ARBITRATION PURSUANT TO THE 1976 RULES OF
THE UNITED NATIONS COMMISSION ON INTERNATIONAL TRADE LAW
PCA CASE No. 2013-31
(1) Yukos Capital S.à.r.l. (Claimant)
– and –
(2) The Russian Federation (Respondent)
Tribunal
Professor Campbell McLachlan, QC (Chairman)
Mr. J. William Rowley, QC
Professor Brigitte Stern
3 November 2014
GIBSON, DUNN & CRUTCHER LLP
Telephone House
2-4 Temple Avenue, London EC4Y 0HB
020 7071 4000 020 7071 4244 Fax
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1. Quoting William Shakespeare in a legal submission is always a dangerous thing to do. Nonetheless, the objections to this Tribunal’s jurisdiction set forth in Respondent’s Memorial on Jurisdiction1 may best be characterised as follows: “it is a tale . . . full of sound and fury, signifying nothing”.2
2. Respondent, the Russian Federation, claims that, while it provisionally applied certain unidentified parts of the Energy Charter Treaty (the “ECT”) during the relevant time period, it did not apply the dispute resolution provisions of Article 26 ECT because those specific provisions, it is said, are inconsistent with Russian law. Hence, there is no agreement to arbitrate and no jurisdiction.
3. This “piecemeal” approach to provisional application, whereby each signatory’s domestic law determines the specific Treaty provisions that apply, or do not apply, to it, represents a fundamentally flawed interpretation of Article 45(1) ECT. Indeed, Respondent previously said precisely the opposite to its own parliament (the State Duma), the Energy Charter Conference and all potential investors via its Ministry of Foreign Affairs website. Moreover, and in any event, far from being inconsistent with Russian law, the arbitration of disputes under international treaties is positively encouraged and has been agreed to by Respondent on countless occasions.
4. Respondent first employed the “piecemeal” argument against the former majority shareholders of Yukos Oil Company in an attempt to escape international responsibility for its unlawful acts.3 The argument was soundly rejected by the distinguished tribunal which heard that case, as it has been by other tribunals constituted under the ECT. Under the plain meaning of Article 45(1) ECT, signatories are permitted to avoid provisional application of the Treaty—not some
1 Dated 28 July 2014 (“Resp. Mem.”). ↩
2 William Shakespeare, MacBeth, Act V, Scene V. ↩
3 The former majority shareholders have no interest in the Claimant or Stichting Administratiekantoor Yukos International (“Yukos Stichting”), the Dutch trust structure under which Claimant is ultimately held. ↩
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part of it—only to the extent the principle of provisional application is inconsistent with their domestic law; that is not the case with Russia, nor does Respondent suggest that it is.4 Respondent has offered no persuasive reason why this Tribunal should decide the issue any differently, and, in Claimant’s respectful submission, it should not.
5. Respondent claims that the US$ 3.2 billion in loans made by Claimant to Yukos Oil Company (the “Loans” as defined further below) do not constitute Investments under Article 1(6) ECT, despite the fact that “Investment” is expressly defined to include “debt of a company or business enterprise” and “every kind of asset”. Just to state the proposition is to recognize its fallacy.
6. Resorting to “sound and fury”, Respondent seeks to attribute sinister meaning to the fact that the Loans are intercompany loans representing the tax efficient repatriation of funds for investment in Russia. There is nothing sinister and this fact does not and cannot change the nature of the Loans as Investments under the ECT. No doubt in recognition of this, Respondent suggests that the intercompany nature of the Loans means they are really dividends “dressed up” as loans. No support is offered for this suggestion and it is truly a frivolous point. Intercompany loans are used by multinational corporations the world over to finance their activities—in precisely the way Claimant did here—and there are virtually uniform rules that establish the line between a dividend and a loan. The Loans at issue in this case do not come close to that line—they are loans and nothing else. Stated differently, they are Investments under Article 1(6) ECT.
7. Respondent next suggests that, to determine whether the Loans are Investments, this Tribunal should depart from the express language of Article 1(6) and import the Salini test developed in ICSID jurisprudence. The Salini test is controversial even in the ICSID context; more importantly, there is no basis on which the clear and
4 Alternatively, signatories may elect not to apply the Treaty provisionally by making a declaration under Article 45(2) ECT. Respondent did not do so. ↩
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unambiguous definition of Investment in the ECT should be supplemented. A consistent line of ECT jurisprudence, ignored by Respondent, confirms this principle. In at least two ECT awards, the precise “general international law” argument now advanced by Respondent (in one, by Respondent itself)—relying on exactly the same “authorities”—was considered and dismissed as devoid of merit.
8. While the Tribunal should not be distracted by this argument, the Loans would satisfy Respondent’s test in any event. Claimant was not a mere “conduit” that “never committed any funds of its own”. An essential feature of lending activity in most banks and financial institutions is that lenders borrow money to lend and profit on the spread between the cost of funds and the interest/returns received. Claimant acted no differently. It borrowed funds to lend them. Having done so, the borrowed funds became Claimant’s funds as a matter of law and those funds were invested by it in Russia. The Loans had common attributes of risk associated with them, and Claimant hedged its risk, again as most lending institutions seek to do, although it did not obtain a perfect hedge.
9. Finally, Respondent challenges the Tribunal’s jurisdiction on the ground that it is entitled to deny the benefits of ECT protection to Claimant pursuant to Article 17 ECT. This objection is entirely without merit. As a preliminary threshold issue, any alleged right to deny benefits pursuant to Article 17 ECT applies only to Part III ECT and does not apply to the right to arbitrate claims found in Part V, Article 26 ECT. Moreover, a valid denial of benefits would require the Respondent to show that: (i) it has exercised its right to deny benefits; (ii) such right has retrospective effect; and (iii) Claimant falls within the two cumulative substantive requirements of Article 17(1).
10. Every Tribunal to have considered Article 17 has determined that the right to deny benefits has to be positively exercised and has only prospective, effect; i.e., has no effect on actions that have already accrued. Here the Respondent did not exercise its right until 11 April 2014.
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11. Respondent is also unable to prove the two substantive requirements for denying benefits pursuant to Article 17(1), namely: to show that “nationals of a third state own or control” Claimant and that Claimant “has no substantial business activities” in Luxembourg. It has shown (and can show) neither. Claimant is owned and controlled by its 100% parent, Yukos International UK BV (“Yukos International”). The shares in Yukos International are owned by Yukos Stichting. Each is a Dutch entity. As the Netherlands is a Contracting Party to the ECT, Claimant is not owned or controlled by a “third party”. Furthermore, Claimant is far from a “paradigmatic shell company”—typically associated with holding companies engaged in no business. Claimant engaged in numerous, significant transactions and, when observed from the perspective of Luxembourg-based group finance company, there is no question that Claimant engaged in substantial business activity there. To the extent that activity has been curtailed, that was caused by Respondent’s wrongful acts; Respondent cannot be heard to say that it should benefit from its wrongdoing such as to deny benefits to Claimant.
12. In sum, Respondent’s objections to jurisdiction, taken singly or together, “signify nothing”. They should be rejected and this case should proceed for a determination on the merits.
13. With respect to Respondent’s challenge to this Tribunal’s jurisdiction, the facts are relatively simple. They are, moreover, not in dispute nor seriously subject to dispute. Set forth below is a summary of the material facts for purposes of the jurisdictional phase of proceedings. These facts are expanded upon as appropriate in the substantive chapters of the Counter-Memorial that follow.
14. Respondent, the Russian Federation, through its former President Boris Yeltsin, signed the Energy Charter Treaty on 17 December 1994. Upon doing so, pursuant to
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Article 45(1) ECT, Respondent undertook to “apply this Treaty provisionally pending its entry into force for such signatory . . . to the extent that such provisional application is not inconsistent with its constitution, laws or regulations”.
15. Respondent understood its obligation of provisional application. Among other things, at the 17-18 December 2002 Energy Charter Conference, the Russian delegation emphasized that: “The Russian Federation has yet to ratify the Energy Charter Treaty, but as a Signatory Country, it implements the Treaty from the day it entered into force”.5 Similarly, as late as 23 May 2007, the website of the Ministry of Foreign Affairs of the Russian Federation contained an information bulletin confirming that: “the Russian Federation applies [the ECT] on a provisional basis in accordance with Part II of the Vienna Convention on the Law of Treaties (1969) and Section II of the Federal Law on International Treaties of the Russian Federation of June 16, 1995”.6
16. Pursuant to Article 45(3)(a) ECT:
“Any signatory may terminate its provisional application of this Treaty by written notification to the Depository of its intention not to become a Contracting Party to the Treaty. Termination of provisional application for any signatory shall take effect upon the expiration of 60 days from the date on which such signatory’s written notification is received by the Depository”.
17. On 20 August 2009, Respondent communicated a notice to the ECT depository that, “[i]n accordance with Article 45(3)(a) of the Energy Charter Treaty, signed in Lisbon on 17 December 1994, with the present the Russian Federation declares that it does not intend to become a participant in the said Treaty”.7 Thus, Russia’s provisional application of the ECT terminated on 13 October 2009. Pursuant to Article 45(3)(b) ECT, its agreement to arbitrate disputes with respect to Investments made before that date, such as Claimant’s, continues for another 20 years thereafter.
5 Statement by the Delegation of the Russian Federation to the Energy Charter Conference, 17-18 December 2002 (Exhibit C118). ↩
6 Information Bulletin on the Energy Charter Treaty, official website of the Russian Federation Ministry of Foreign Affairs, 25 November 2005 (Exhibit C119). ↩
7 Notification by Russian Federation to Portuguese Republic pursuant to Article 45(3)(a) of the ECT, 20 August 2009 (Exhibit R5). ↩
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18. Respondent also asserted in its notice to the ECT depository that “it did not apply provisionally any Treaty provision to the extent that such provisional application was inconsistent with the Constitution, laws or regulations of the Russian Federation”.8 This assertion, reflecting the Respondent’s “piecemeal” interpretation, is contrary to its previous communications and inconsistent with Article 45(1) ECT and Respondent’s own conduct and laws. As noted previously, it was added to Respondent’s notice because, by 2009, the former majority shareholders in Yukos had brought claims against it under the ECT and Respondent wished to then argue— ultimately and not surprisingly without success—that it had no obligation to provisionally apply the dispute resolution provisions of Article 26 ECT.
19. Claimant, Yukos Capital, was incorporated in Luxembourg on 31 January 2003 as a “société à responsabilité limitée”. On incorporation, TMF Corporate Services S.A. in Luxembourg was appointed as the sole director (gérant) of Yukos Capital,9 and remained Yukos Capital’s sole director until 6 February 2007. TMF Management Luxembourg S.A. was appointed as Claimant’s domiciliary agent and was authorized to manage, maintain and operate the Company. TMF Corporate Services S.A. and TMF Management Luxembourg S.A. are referred to herein individually and together as “TMF Luxembourg.” Following its resignation as sole director, TMF Luxembourg was appointed an attorney-in-fact with authorization to handle day-to-day administrative matters on Yukos Capital’s behalf in Luxembourg.10
20. The reasons motivating Claimant’s formation are explained in the following excerpt from testimony submitted by former PwC and Yukos tax advisor Steven Wilson in the second trial of Mikhail Khodorkovsky:
8 Id. (emphasis added) (Exhibit R5). ↩
9 Extract from the Luxembourg Register of Commerce, 26 March 2003 (Exhibit C120). ↩
10 Domiciliation Agreement, 6 February 2003 (Exhibit C121); Management Agreement, 20 March 2003 (Exhibit C122); Extract from the Luxembourg Register of Commerce, 15 February 2007 (Exhibit C123); Written Resolution of the Sole Director, 6 February 2007 (Exhibit C124). ↩
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“[A] key treasury objective was to enable funds to be brought into Russia in the form of loans from Yukos Capital Sarl, the Luxembourg finance company established for this very purpose. Yukos Capital Sarl charged arm’s length interest on its loans to the Yukos production subsidiaries. I had been informed by treasury personnel that inter-company lending within the group was an important priority as funds accumulated outside Russia (from Russian trading profits distributed to the offshore structure, foreign trading profits accumulated offshore and treasury profits accumulated offshore) at low tax rates would be needed for investment in Russia.”11
21. Yukos Capital, through its counsel Loyens & Loeff (“Loyens”), explained its business model to the Luxembourg tax authorities and sought (and obtained) their approval for its tax treatment and status as a “normally taxable resident company” entitled to receive a “residence certificate”.12
22. Claimant’s business was approved by the Luxembourg tax authorities on the basis of the following description:
“Luxco [Claimant] will be active as a group finance company, i.e. it is currently anticipated that Luxco will borrow up to some US $ 500 million from one or more group companies and will on-lend these loan proceeds at arm’s length interest rates to various group companies, i.e. in the UK and in other EU and non-EU countries.
The loans to the various group companies will be denominated in such currencies as to avoid / manage local Foreign Exchange (FX) exposures. This may be local currency or a currency which is intended to match a currency asset of the borrowing company. Luxco’s debts will generally be US $ or Euro denominated. Luxco will therefore enter into arm’s length hedges (intra-group or third party), such as currency and/or interest rate swaps so as to manage its FX and other financial exposures.
Furthermore Luxco will enter into e.g. hedges or other similar financial instruments so as to avoid or minimise bad debt risks.
11 Interview Record of Steve Wilson, 16 April 2010, ¶49 (Exhibit C125) (emphasis added); see also Witness Statement of Bruce K. Misamore, dated 31 October 2014 (the “Misamore Statement”), ¶8. ↩
12 Letter from Loyens &Loeff to the Luxembourg Tax Authority, 27 February 2003 (“Loyens February 2003 Letter”), (Exhibit C128). Yukos Capital subsequently received a certificate of residence from the Administration Des Contributions Directes in Luxembourg (i.e., the Luxembourg tax authority) and a registration certificate from the Russian Ministry for Tax (now the Russian Federal Tax Service). See Certificate of Residence, 9 February 2004 (Exhibit C126); Certificate of Registration, 20 January 2004 (Exhibit C127). ↩
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It is expected that Luxco’s annual net income as per its commercial accounts derived from the above-mentioned activities (interest income, interest expense, hedge fees paid or received, hedge income less hedge expense, and general and administrative expenses as well as other expenses associated with its finance activities), will amount to at least 1/16% calculated over the average amounts borrowed and on-lent.13
In our view such interest spread can be considered as an arm’s length remuneration for Luxco’s activities, given that Luxco will manage / avoid its bad debt and FX risks and also based on what is customary in the financial markets. In our experience, banks and similar financial institutions when acting with third parties in the normal course of their business under comparable terms and conditions, generally derive an interest margin from such activities which is similar.”14
23. As Claimant’s expert, Stuart Gleichenhaus of FTI Consulting, confirms in his report: “the use of intercompany debt is ubiquitous” and represents a “very common and often-utilized strategy for cash management in multinational companies and their subsidiaries.”15
24. In furtherance of Yukos Capital’s principal business purpose, i.e. acting as a group finance company, it entered into numerous loan agreements as either lender or borrower. In 2003 and 2004, Claimant entered into at least 40 loan agreements, including the two loan agreements to Yukos Oil related to these proceedings (see below). All of these 40 loan agreements were executed by TMF Corporate Services S.A. in Luxembourg.16 The total value of the 40 loan agreements was in excess of US$ 10 billion.
13 When Claimant’s lending activities came to well exceed the contemplated US$ 500 million figure, permission was sought and obtained for an agreed income spread of 1/32%. See Letter from Loyens & Loeff to the Luxembourg Tax Authority, 9 April 2004 (“Loyens April 2004 Letter”), (Exhibit C129). ↩
14 Loyens February 2003 Letter, pages 1-2 (Exhibit C128). ↩
15 Expert Report of Stuart Gleichenhaus, FTI Consulting, dated 3 November 2014 (the “FTI Rep.”), ¶ 20 (citations omitted). ↩
16 See, for example, December 2003 Loan (Exhibit C9); August 2004 Loan (Exhibit C30); Loan Agreement 01-07, 20 July 2004; Loan Agreement 04-07, 23 July 2004, Loan Agreement 07-07, 4 August 2004; Loan Agreement 11-08, 13 August 2004 (all included in Exhibit R53); Loan Agreement 02-07, 20 July 2004, Loan Agreement 05-07, 27 July 2004, Loan Agreement 08-07, 4 August 2004 (all included in Exhibit R54); Loan Agreement 03-07, 20 July 2004, Loan Agreement 06-07, 27 July 2004 (both included in Exhibit R72); Loan Facility Agreement between Brittany Assets Limited and Yukos (Cont’d on next page) ↩
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25. Pursuant to a loan agreement dated 2 December 2003 (the “December 2003 Loan”), Claimant agreed to loan Yukos Oil an amount not to exceed RUR 80 billion (US$ 2.7 billion). Interest was to be paid quarterly at a rate of 9%, with the borrowed principal repaid by 31 December 2008. Any delay in payment entitled Claimant to a penalty in the amount of 0.1% of the amount overdue.17
26. Between December 2003 and June 2004, RUR 79.3 billion (approximately US$ 2.7 billion) was disbursed to Yukos Oil pursuant to the December 2003 Agreement. More specifically, RUR 8.5 billion was advanced on 3 December 2003, RUR 26 billion was advanced on 8 December 2003 and the remainder was advanced during December 2003 and the first six months of 2004.18
27. If one takes only a short term/snap shot view of Yukos Oil’s treasury operations at the time, the RUR 26 billion funds loaned on 8 December 2003 could be said to have been applied toward a dividend payment to Yukos Oil’s shareholders. That dividend payment, in turn, was required to implement a merger between Yukos Oil and Sibneft whereby the merged company, YukosSibneft, would have become the world’s fourth largest private (i.e., non-State owned) oil company behind BP, Exxon and Royal Dutch Shell.19 The remaining proceeds of the December 2003 Loan were utilized “for working capital to fund the continuing operations of Yukos Oil, which operations were being obstructed by the increasingly hostile and illegal acts of the Russian authorities”.20
(Cont’d from previous page)
Capital, 20 November 2003 (Exhibit C130); Loan Agreement HgYCS-1808/04, 18 August 2004 (Exhibit C131).
17 See December 2003 Loan (Exhibit C9). ↩
18 Yukos Capital bank statements and payment orders - December 2003 Loan payments, December 2003 to June 2004 (Exhibit C132); Misamore Statement, ¶¶ 35-36. ↩
19 Misamore Statement, ¶¶ 24-36; See Yukos and Sibneft Agree in Principle to Merger, Yukos Press Release and Sibneft Press Release, 22 April 2003, (Exhibit C133). ↩
20 Misamore Statement, ¶ 36. ↩
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28. Yukos Oil made quarterly interest payments under the December 2003 Loan for the quarters ending 31 December 2003, 31 March 2004 and 30 June 2004.21 Due to the unlawful acts of the Respondent that comprise the merits of this case, no further payments were made.22
29. Pursuant to a loan agreement dated 19 August 2004 (the “August 2004 Loan”) (together with the December 2003 Loan, the “Loans”), Claimant agreed to lend Yukos Oil US$ 355 million. Interest was to be paid semi-annually at a rate of six-month LIBOR plus 1.75%, with the borrowed principal repaid by 30 December 2009. Any delay in payment entitled Claimant to a daily penalty in the amount of 0.1% of the amount overdue.23
30. The US$ 355 million available under the August 2004 Loan was disbursed to Yukos Oil contemporaneous with the execution of the loan agreement.24 The loan proceeds were to be used by Yukos Oil to make a partial payment toward the immense (and bogus) tax assessments that formed part of Respondent’s strategy for the expropriation of Yukos assets and destruction of the Yukos Oil.25 As Bruce Misamore, the former Chief Financial Officer of Yukos Oil explains in his testimony: “At that time we were desperately trying to keep the business alive in the hope that President Putin was not intent on destroying the entire company and that a negotiated resolution might be achieved. Of course that hope proved to be wholly misplaced”.26
21 Yukos Capital bank statements - interest payments (Exhibit C134). ↩
22 Misamore Statement, ¶15; Letter from Yukos Oil to Yukos Capital, 12 November 2004 (Exhibit C135). ↩
23 See August 2004 Loan (Exhibit C30). ↩
24 Yukos Capital bank statement and transfer request - August 2004 Loan payment, 19 August 2004 (Exhibit C136). ↩
25 Minutes No. 120-18 of the Meeting of the Board of Directors of OAO Yukos Oil Company (19 August 2004) (Exhibit R48). ↩
26 Misamore Statement, ¶ 38. ↩
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31. For the reason noted above, no interest payments were made on the August 2004 Loan.27
32. Respondent was at all relevant times aware of the Loans made by Claimant to Yukos Oil. Among other things, the Loans were disclosed in financial statements filed by Yukos Oil with the Russian tax authorities and in applications to the Russian tax authorities for exemptions in connection with the interest payments made by Yukos under the December 2003 Loan.28
33. Upon Yukos Oil’s default in payment under the Loans, Claimant sent a formal notice of default by letter dated 11 November 2005.29 Claimant took subsequent steps to accelerate the Loans and sought to recover as a creditor in the orchestrated “bankruptcy” of Yukos Oil that commenced in 2006 and concluded with the dissolution of Yukos Oil in November 2007. Those efforts proved unsuccessful.30
34. The treatment received by Claimant in the so-called Yukos Oil “bankruptcy” and the expropriation of Yukos Oil’s assets and destruction of the Company will be the subject of the merits phase of this Proceeding. For now, Claimant notes that each of the investment treaty tribunals to have examined these matters reached the following common conclusion:
“[D]espite having used nearly identical tax structures, no other Russian oil company was subjected to the same relentless and inflexible attacks as Yukos. In the view of the Tribunal, they can only be understood as steps under a
27 Misamore Statement, ¶ 15; Letter from Yukos Capital to Hedgerow Limited, 30 December 2004 (Exhibit C138). ↩
28 Explanatory note to the financial report of Yukos Oil for 2004, pp. 17-18, section 3.5 (Exhibit C137); Misamore Statement, ¶15. The exemption from Russian tax on the interest payments is pursuant to Article 11 of the Convention between the Grand Duchy of Luxembourg and the Russian Federation on Double Taxation (the “Luxembourg-Russia Double Taxation Treaty”). ↩
29 Notice of Default, 11 November 2005 (Exhibit C139). ↩
30 See Claimant’s Notice of Arbitration dated 15 February 2013 (the “Notice”), ¶¶ 177-207. ↩
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common denominator in a pattern to destroy Yukos and gain control over its assets”;31
“Based on the extensive record in this Proceeding, the Tribunal concludes that Yukos’ tax delinquency was indeed a pretext for seizing Yukos assets and transferring them to [State-controlled] Rosneft. As discussed, this finding supports the Claimants’ contention that the Russian Federation’s real goal was to expropriate Yukos, and not to legitimately collect taxes”;32
“After having now traversed, at some length, the treatment of Yukos by Russian tax authorities, the bailiffs and the courts, and having considered the totality of the evidence, especially the VAT evidence, the Tribunal has concluded that the primary objective of the Russian Federation was not to collect taxes but rather to bankrupt Yukos and appropriate its valuable assets”.33
35. Two preliminary points should be made before addressing Russia’s arguments on provisional application. First, Respondent does not dispute that Article 45(1) ECT was triggered upon its signing of the Treaty on 17 December 1994 and that it then assumed an obligation of provisional application.34 Russia’s dispute before this Tribunal concerns the nature and duration of the Treaty obligations it agreed to apply provisionally.35 Second, as to those issues (i.e., the nature and duration of Russia’s
31 RosInvestCo Uk Ltd. v The Russian Federation, SCC Arbitration V 079/2005, Final Award, 12 September 2010, (Veeder, Hobér, Eliasson), ¶ 621 (Exhibit C109). ↩
32 Quasar De Valores SICAV S.A. and others v. The Russian Federation, SCC Arbitration 24/2007, Final Award, 20 July 2012 (Landau, Brower, Paulsson), ¶¶ 177, 186 (Exhibit C-116). ↩
33 Hulley Enterprises Limited (Cyprus) v. The Russian Federation, PCA Case No. AA 226, Final Award, 18 July 2014 (Fortier, Poncet, Schwebel), ¶ 756 (“Hulley Enterprises Final Award”) (Exhibit CL10). ↩
34 Hulley Enterprises Limited (Cyprus) v. The Russian Federation, PCA Case No. AA 226, Interim Award on Jurisdiction and Admissibility, 30 November 2009, (Fortier, Poncet, Schwebel), (“Hulley Enterprises Jurisdiction Award”), ¶¶ 330-45 (Exhibit CL9). ↩
35 Pursuant to Article 45(3)(b) ECT, where provisional application is terminated, the signatory’s obligations under the dispute resolution provisions of Article 26, among others, “shall nevertheless remain in effect with respect to those Investments for twenty years following the effective date of (Cont’d on next page) ↩
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provisional application), Respondent fully litigated and lost before the Hulley Enterprises Tribunal. While that result is not dispositive of the issues here, the Award represents an important authority not so much as mentioned in Respondent’s Memorial on Jurisdiction.
36. Russia’s position on provisional application is captured in the following excerpts from its Memorial:
(Cont’d from previous page)
termination . . . .”. Respondent argues that any obligations terminated six months after signing of the ECT.
38 Resp. Mem., ¶ 10 (emphasis in original). ↩
40 Resp. Mem., ¶ 64 (emphasis in original). ↩
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37. Stated differently, (i) Article 45(1) ECT permits piecemeal provisional application (i.e., application of only a portion of the treaty’s obligations) and Russia does not, and never did, provisionally apply the arbitration provisions of Article 26 ECT because (ii) those provisions are inconsistent with Russian law. If either of these propositions is incorrect, Russia’s argument on provisional application fails.
38. As discussed below, Respondent’s arguments on provisional application are frivolous: (i) properly construed, it is only if the principle of provisional application is inconsistent with a signatory’s domestic law that application of the ECT may be excused under Article 45(1) ECT; Russia does not argue, nor could it, that this is the case here; (ii) in any event, nothing about Article 26 ECT is inconsistent with Russian law because (a) Russia’s international treaty obligations become part of domestic law and take priority over any otherwise inconsistent provisions of Russian domestic law, (b) no provision of Russian law precludes the arbitration of public international law disputes under investment treaties, and (c) no such preclusion would operate on the international plane; and (iii) the six-month ratification rule of Russian domestic law was not in force when the ECT was signed and, even if it had been, failure to comply with it has no impact on Respondent’s international law obligation of provisional application.
39. Pursuant to Article 31(1) of the Vienna Convention of the Law of Treaties (1969),41 the starting point for interpretation of Article 45 ECT is that “[a] treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.”
40. The text of Article 45 ECT provides:
41 Vienna Convention on the Law of Treaties, 23 May 1969 (the “Vienna Convention”) (Exhibit RL49). ↩
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“(1) Each signatory agrees to apply this Treaty provisionally pending its entry into force for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its constitution, laws or regulations.
(2) (a) Notwithstanding paragraph (1) any signatory may, when signing, deliver to the Depository a declaration that it is not able to accept provisional application. The obligation contained in paragraph (1) shall not apply to a signatory making such a declaration. Any such signatory may at any time withdraw that declaration by written notification to the Depository.
(b) Neither a signatory which makes a declaration in accordance with subparagraph (a) nor Investors of that signatory may claim the benefits of provisional application under paragraph (1).
(c) Notwithstanding subparagraph (a), any signatory making a declaration referred to in subparagraph (a) shall apply Part VII provisionally pending the entry into force of the Treaty for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its laws or regulations.
(3) (a) Any signatory may terminate its provisional application of this Treaty by written notification to the Depository of its intention not to become a Contracting Party to the Treaty. Termination of provisional application for any signatory shall take effect upon the expiration of 60 days from the date on which such signatory’s written notification is received by the Depository.
(b) In the event that a signatory terminates provisional application under subparagraph (a), the obligation of the signatory under paragraph (1) to apply Parts III and V with respect to any Investments made in its Area during such provisional application by Investors of other signatories shall nevertheless remain in effect with respect to those Investments for twenty years following the effective date of termination, except as otherwise provided in subparagraph (c).
(c) Subparagraph (b) shall not apply to any signatory listed in Annex PA. A signatory shall be removed from the list in Annex PA effective upon delivery to the Depository of its request therefor.
(4) Pending the entry into force of this Treaty the signatories shall meet periodically in the provisional Charter Conference, the first meeting of which shall be convened by the provisional Secretariat referred to in paragraph (5) not later than 180 days after the opening date for signature of the Treaty as specified in Article 38.
(5) The functions of the Secretariat shall be carried out on an interim basis by a provisional Secretariat until the entry into force of this Treaty pursuant to Article 44 and the establishment of a Secretariat.
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(6) The signatories shall, in accordance with and subject to the provisions of paragraph (1) or subparagraph (2)(c) as appropriate, contribute to the costs of the provisional Secretariat as if the signatories were Contracting Parties under Article 37(3). Any modifications made to Annex B by the signatories shall terminate upon the entry into force of this Treaty.
(7) A state or Regional Economic Integration Organization which, prior to this Treaty’s entry into force, accedes to the Treaty in accordance with Article 41 shall, pending the Treaty’s entry into force, have the rights and assume the obligations of a signatory under this Article.”
41. The obligation of provisional application is found in Article 45(1) ECT. The language relied upon by Russia for its piecemeal approach is the following proviso: “to the extent that such provisional application is not inconsistent with its [i.e., the signatory’s] constitution, laws or regulations”. This limiting language, by its terms, applies only to “such provisional application” and it is the meaning of “such provisional application” that must drive the interpretation.
42. The word “such”, ignored by Respondent, means as a matter of plain English in this context: “of the kind specified”.42 Here, the kind of provisional application specified is that “Each signatory agrees to apply this Treaty provisionally pending its entry into force for such signatory . . .”.43 Thus, the obligation is to apply “this Treaty” provisionally, not some self-selected portion of it. And the limiting “to the extent” language therefore operates only where applying “this Treaty” (i.e., the principle of provisional application itself) is inconsistent with the signatory’s constitution, laws or regulations.
43. As put by the Hulley Enterprises Tribunal: “Indeed, without any further qualification, it is to be presumed that a reference to ‘this Treaty’ is meant to refer to the Treaty as a whole, and not only part of the Treaty”.44
42 “such”, Merriam-Webster.com, available at http://www.merriam-webster.com/dictionary/such (accessed on 28 October 2014) (Exhibit C140). ↩
43 Article 45(1) ECT (Exhibit C1). ↩
44 Hulley Enterprises Jurisdiction Award, ¶ 308 (Exhibit CL9). ↩
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44. The tribunal in Kardassopoulos v. Georgia reached the same conclusion (also ignored by Respondent):
“It is ‘this Treaty’ which is to be provisionally applied, i.e., the Treaty as a whole and in its entirety and not just a part of it; and use of the word ‘application’ requires that the ECT be ‘applied’. Since that application is to be provisional ‘pending its entry into force’ the implication is that it would be applied on the same basis as would in due course result from the ECT’s (definitive) entry into force, and as if it had already done so”.45
45. Indeed, the respondent state in Kardassopoulos, the Republic of Georgia, did not even argue for the piecemeal approach now advanced by Russia.
46. Further support for Claimant’s interpretation is found in Article 17(1) of the Vienna Convention, which provides that “the consent of a State to be bound by part of a treaty is effective only if the treaty so permits or the other contracting States so agree”. The Commentary to the Draft Articles on the Law of Treaties explains that:
“Some treaties expressly authorize States to consent to a part or parts only of the treaty or to exclude certain parts, and then, of course, partial ratification, acceptance, approval or accession is admissible. But in the absence of such a provision, the established rule is that the ratification, accession, etc. must relate to the treaty as a whole . . .”.46
47. Here, Article 45(1) ECT contains no express authorization for signatory states to provisionally apply only part of the Treaty. When a signatory consents to apply it provisionally, as Russia did, that consent is with respect to the entire treaty (i.e., “this Treaty”).
48. Article 45(2)(a) ECT lends additional support. That article provides that if, for whatever reason, a signatory “is not able to accept provisional application”, it may upon signing deliver to the Depository a declaration to that effect. In that event, “The obligation contained in paragraph (1) shall not apply to a signatory making such a
45 Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18, Decision on Jurisdiction, 6 July 2007 (Fortier, Vicuña, Watts) (“Kardassopoulos”), ¶ 210 (Exhibit CL11). ↩
46 Yearbook of International Law Commission, Vol. II, 1966 (“ILC Yearbook”), pp. 201-202 (Exhibit CL46). ↩
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declaration”. Respondent does not disagree that with respect to Article 45(2)(a) ECT, there can be no question that “provisional application” means application of the Treaty as a whole.47 Article 45(2)(a) provides that a declaration removes “[t]he obligation contained in paragraph (1)”, making clear that “provisional application” has the same meaning under both Articles 45(1) and 45(2)(a) (i.e., application of the Treaty as a whole).
49. Article 45(2)(b) provides that “[n]either a signatory which makes a declaration in accordance with subparagraph (a) nor Investors of that signatory may claim the benefits of provisional application under paragraph (1).” This reflects a reciprocity of obligations and not surprisingly provides that investors of a signatory may not claim Treaty benefits unless the signatory consents to apply “this Treaty” provisionally (i.e., in its entirety). If that were not the case, for example, where Signatory A provisionally applies only part of the Treaty, its investors would receive far greater protection than investors of other signatories making investments in Signatory A.
50. That cannot have been the intent of Article 45(1) ECT for obvious reasons:
“Allowing a State to modulate (or, as the case may be, eliminate) the obligation of provisional application, depending on the content of its internal law in relation to the specific provisions found in the Treaty, would undermine the principle that provisional application of a treaty creates binding obligations”.48
51. Similarly:
“This would create unacceptable uncertainty in international affairs. Specifically, it would allow a State to make fluctuating, uncertain and un-notified assertions about the content of its domestic law, after a dispute has already arisen. Such a State, [...] ‘would be bound by nothing but its own whims and would make a mockery of the international legal agreement to which it chose to subject itself.’ A treaty should not be interpreted so as to
47 Resp. Mem., ¶ 42 (“Article 45(2)(c) ECT requires a signatory that has declared itself unable to accept provisional application of the Treaty as a whole nevertheless to apply Part VII . . .”) (emphasis added). ↩
48 Hulley Enterprises Jurisdiction Award, ¶ 314 (Exhibit CL9). ↩
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allow such a situation unless the language of the treaty is clear and admits no other interpretation. That is not the case with Article 45(1) of the ECT.”49
52. Article 45(2)(c) expressly does provide for provisional application of only part of the ECT and, in that respect, underscores that Article 45(1) does not. Article 45(2)(c) requires that, where a signatory makes a declaration under Article 45(2)(a) that it is unable to accept provisional application (i.e., application in its entirety), it shall nonetheless “apply Part VII provisionally . . . to the extent that such provisional application is not inconsistent with its laws or regulations”.50 This makes clear that the use of “provisional application” in Articles 45(1) and 45(2)(a) refers to application of the Treaty as a whole; Article 45(2)(c) then creates a specific exception where parties are to apply only Part VII. As with Article 45(1), the drafters used “such provisional application” in Article 45(2)(c) to refer to the specific kind of provisional application being addressed by the provision in question; in the context of Article 45(2)(c), “appl[ication] of Part VII provisionally”.
53. Support for Claimant’s position also is found in Article 45(3)(a), which sets out the mechanism to terminate provisional application of “this Treaty”, and Article 45(3)(b), providing that where a signatory terminates its provisional application, “the obligation of the signatory under paragraph (1) to apply Parts III and V . . . shall nevertheless remain in effect . . . .” This latter language can only be read to confirm that application of Parts III and V of the ECT is part of the obligation of provisional application found in Article 45(1); it would otherwise be nonsensical. Article 45(3)(c) creates the express mechanism for signatories to except themselves from the continued application of Parts III and V—a listing in Annex PA (which Russia did not do). Part V of the ECT, of course, is where the Treaty’s dispute resolution provisions are found and it is those provisions that Respondent claims it has no obligation to apply provisionally under Article 45(1). Having failed to list in Annex PA, the argument cannot be sustained.
49 Hulley Enterprises Jurisdiction Award, ¶ 315 (Exhibit CL9). ↩
50 Part VII of the ECT concerns the international “Structures and Institutions” required to implement the Treaty’s terms and facilitate communications among signatory States (Exhibit C1). ↩
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54. Finally, Article 45(6) ECT provides that: “The signatories shall, in accordance with and subject to the provisions of paragraph (1) or subparagraph (2)(c) as appropriate, contribute to the costs of the provisional Secretariat as if the signatories were Contracting Parties . . . ". This again recognizes that there are two distinct categories of provisional application provided for in Article 45, application of the Treaty as a whole under Article 45(1) or application only of Part VII under Article 45(2)(c). For the reasons set forth above, there can be no other interpretation.
55. In sum, as expressed by the Hulley Enterprises Tribunal:
“In the Tribunal’s opinion, there is no basis to conclude that the signatories would have assumed an obligation to apply only part of the Treaty provisionally, without making such partial provisional application explicit. The Tribunal therefore concludes that the Limitation Clause in Article 45(1) contains an ‘all-or-nothing’ proposition: either the entire Treaty is applied provisionally, or it is not applied provisionally at all”.51
56. We add that Respondent’s interpretation also runs counter to the fundamental principle found in Article 27 of the Vienna Convention that “[a] party may not invoke the provisions of its internal law as justification for its failure to perform a treaty”.52
57. Russia purports to hold this principle dear. As expressed by the Russian Federation Constitutional Court in a March 2012 Judgment (buried in a footnote to Respondent’s Memorial):53
“[...] the Russian Federation may not evade in good faith performance of international treaties that have entered into force, to which it is a party. The basis for such legislative regulation is that the Russian Federation, being a sovereign state (the preamble, part 1 of Article 3 and part 1 of Article 4 of the Constitution of the Russian Federation), is an independent and equal participant of interstate relations and at the same time, declaring itself a democratic and a rule-of-law state (part 1 of Article 1 of the Constitution of the Russian Federation), it should observe obligations it has voluntary assumed for itself within international treaties, which is supported by the
51 Hulley Enterprises Jurisdiction Award, ¶ 311 (Exhibit CL9). ↩
52 Vienna Convention (Exhibit RL49). ↩
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provisions of the Vienna Convention on the Law of Treaties, whereby every state possesses capacity to conclude treaties, which cannot be binding without expressing the respective consent (Articles 6 and 11); every treaty in force is binding upon the parties to it and must be performed by them in good faith (Article 26), and a party may not invoke the provisions of its internal law as justification for its failure to perform a treaty (Article 27).”54
58. Respondent’s interpretation of Article 45(1) would permit just this result, with the specific scope of provisional application entirely dependent on the degree and nature of each signatory’s invocation of its internal laws.
59. As Professor Michael Reisman opined in the Hulley Enterprises case:
“Hence, whatever the mode by which provisional application is achieved, ‘it can hardly be challenged that provisional application is based on the mutual consent of states.’55 The alternative view, ‘that provisional application is based on a unilateral declaration of intent by contracting parties to de facto apply a treaty subject to existing constitutional and legislative possibilities,’ is untenable insofar as ‘[t]he adoption of such a view could seriously impair the legal effects of provisional application as national law may prevail over the treaty.’56 That result would be inconsistent with Article 27 of the Vienna Convention”.57
60. The Hulley Enterprises Tribunal also found persuasive the following expert opinion of Professor James Crawford:
“The fact is, nonetheless, that international tribunals are reluctant to allow States to plead their internal law as a basis for avoiding what would otherwise appear to be their treaty commitments, and that reluctance extends to cases such as the present. It reflects a strong underlying value against self-judgement and a strong presumption of the separation of international from
54 Resolution No. 8-P of the Constitutional Court of the Russian Federation, 27 March 2012 (“Judgment 8-P”), p. 6 (emphasis added) (Exhibit R35). ↩
55 Quoting Lefeber, R., ‘The Provisional Application of Treaties’ in Klabbers, J. and Lefeber, R. (eds.), Essays On The Law of Treaties: A Collection of Essays in Honour of Bert Vierdag (1998), pp. 81, 89 (“Lefeber 1998”) (Exhibit RL30). ↩
57 Hulley Enterprises Jurisdiction Award, ¶ 318 (Exhibit CL9). Claimant notes that Professor Reisman’s article cited by Respondent and exhibited as Exhibit RL29 does not support the proposition for which it is cited (see Resp. Mem., ¶ 25) and concerns unperfected, ungratified or unilateral acts of states that are not legally binding and divorced from the recognized concept of provisional application as set out in Article 25 of the Vienna Convention (Exhibit RL49). ↩
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national law. Article 27 VCLT (and the corollary, Articles 3 and 32 of the ILC Articles on State Responsibility) are routinely cited across a range of contexts. Even where there is an express treaty exception for domestic legal requirements, that is not treated as a self-judging or ‘automatic’ reservation, and it has to be explained to the satisfaction of the international tribunal – which retains its Kompetenz-Kompetenz – what the domestic requirement means, why it applies and how far it goes.
[emphasis added]
[...] The negotiating parties having opted for an unusually strong system of immediate provisional application of the ECT (while allowing States to opt out of it and take the consequences of doing so under Article 45(2)(b)), I do not accept that they intended to allow ready evasion of the regime.
[emphasis added]”58
61. Article 27 of the Vienna Convention provides that the rule set forth therein is “without prejudice to article 46”, which recognizes a narrow exception. Article 46(1) provides that:
“A State may not invoke the fact that its consent to be bound by a treaty has been expressed in violation of a provision of its internal law regarding competence to conclude treaties as invalidating its consent unless that violation was manifest and concerned a rule of its internal law of fundamental importance.”
62. This is precisely the “to the extent that” exception recognized in Article 45(1) ECT. If a fundamental provision of internal law “regarding competence to conclude treaties” (in this context, competence to agree to provisional application) manifestly precludes the giving of consent to so conclude (or here, apply provisionally) the treaty, a signatory may be released of its obligation to do so on the basis of that national law. That is the extent of the exception.
63. Respondent has not suggested this narrow exception applies to it, nor could it. Article 15(4) of the Russian Constitution recognises the supremacy of the Russian
58 Hulley Enterprises Jurisdiction Award, ¶¶ 316-317 (Exhibit CL9). ↩
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Federation’s international law obligations59 and, with respect to provisional application, Article 23 of Federal Law No. 101-FZ on International Treaties of the Russian Federation (the “FLIT”) mirrors the language of Article 25 of the Vienna Convention:
“Article 23 Provisional application of international treaties by the Russian Federation
1. An international treaty or a part of a treaty may, prior to its entry into force, be applied by the Russian Federation provisionally if the treaty itself so provides or if an agreement to that effect has been reached with the parties that have signed the treaty.
2. Decisions on the provisional application of a treaty or a part thereof by the Russian Federation shall be made by the body that has taken the decision to sign the international treaty according to the procedure set out in Article 11 of this Federal Law [...]”.60
64. Article 23(2) of the FLIT stipulates that decisions on provisional application of a treaty by the Russian Federation shall be made by the body that has taken the decision to sign the treaty and Article 11 of the FLIT clarifies that such signature authority rests with the executive branch.61 Article 6(1) of the FLIT further provides that expression of consent to be bound by an international treaty can take the form of signature62. These elements of Russia’s national law – reflecting the powers set forth in Article 86 of the Russian Constitution63 – were complied with fully in connection with Respondent’s signature of the ECT and consequent agreement to apply “the Treaty” provisionally.
65. Moreover, as emphasized by Russia’s Constitutional Court:
59 Constitution of the Russian Federation, 12 December 1993 (Exhibit AVA1). ↩
60 Law No. 101-FZ on International Treaties of the Russian Federation, 15 July 1995 (the “FLIT”) (Exhibit R24). ↩
61 Respondent omitted Article 11 of the FLIT from the excerpts included with its Exhibit R24, so please see Article 11, FLIT at Exhibit PBS1; see also Hulley Enterprises Jurisdiction Award, ¶ 383 (Exhibit CL9). ↩
63 Expert Report of Professor Paul B. Stephan dated 28 October 2014 (the “Stephan Rep.”), ¶¶ 21-26. ↩
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“Agreement to provisional application of an international treaty means that it becomes part of the legal system of the Russian Federation and must be applied on the same basis as international treaties that have entered into force (unless otherwise expressly stated by the Russian Federation), since otherwise, provisional application would be meaningless. That is why neither the Vienna Convention on the Law of Treaties nor the Federal Law ‘On International Treaties of the Russian Federation’ contains any exemptions from pacta sunt servanda with respect to provisional application of international treaties [...]”.64
66. Accordingly, the language of Article 45 ECT, “interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose”, is clear: as every tribunal to have considered the issue has determined, the Article 45(1) ECT obligation of provisional application accepted by Respondent upon signing the Treaty refers to application of the Treaty as a whole. Respondent’s piecemeal provisional application argument cannot be sustained and runs counter to cardinal principles of international law.
67. Most of Respondent’s arguments in support of its piecemeal approach may be described as supplementary means of interpretation arguments. Because Article 45(1) is not ambiguous or obscure and the plain language interpretation does not lead to a result that is “manifestly absurd or unreasonable”, arguments based on supplementary means are unnecessary and should not be considered pursuant to Article 32 of the Vienna Convention. Russia’s supplementary means arguments are, in any event, misguided as discussed below.
68. It should be emphasized as a threshold matter that agreements by states to provisionally apply treaties is a long standing practice, especially in multilateral treaty situations where there may be a substantial period of time between conclusion of the
64 Judgment 8-P, pp. 8-9 (emphasis added) (Exhibit R35); see also Hulley Enterprises Jurisdiction Award, ¶ 334 (admission by Russia’s counsel that “Russian law is of course familiar with the concept of provisional application, and that was never in dispute”) (Exhibit CL9). ↩
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treaty and its entry into force.65 The practice is considered to reflect customary international law.66 That an agreement to provisional application creates legally binding obligations is clear from the ILC Commentary to Article 25 of the Vienna Convention: a provisionally applicable treaty is binding and constitutes a legally enforceable instrument among signatory states: “[...] there can be no doubt that such clauses have legal effect and bring the treaty into force on a provisional basis.”67
69. The ILC also recognised that the pacta sunt servanda rule applies to treaties that are provisionally applied:
“Consequently, from a drafting point of view, it seemed necessary to specify that it is the treaties in force in accordance with the provisions of the present articles to which the pacta sunt servanda rule applies. The words ‘in force’ of course covers treaties in force provisionally under Article 22 as well as treaties which enter into force definitively under Article 21.”68
70. It is against this established legal framework that Respondent’s supplementary means arguments—and its attempt to evade legal responsibility under international law— must be considered.
71. Many of the points made by Respondent are with respect to the principle of provisional application. They either support Claimant’s position by discussing the provisional application of treaties as a whole, or fail to distinguish this principle from the very different proposition being advanced by Respondent (i.e., piecemeal provisional application). In this regard, the Tribunal should be mindful of Respondent’s quite intentional efforts to confuse or conflate the two.
65 Rogoff M.A. & Gauditz, B.E., ‘The Provisional Application of International Agreements’, (1987) Maine Law Review, Vol.39:29, pp.29-81, at p.40 (Exhibit CL41). ↩
66 Dalton R., 'Provisional Application of Treaties' in Hollis, D. (ed.). The Oxford Guide to Treaties (OUP: 2012), p. 232 (Exhibit CL34). ↩
67 ILC Yearbook, p.210 in relation to Article 22 (Exhibit CL46) which was later adopted as Article 25 of the Vienna Convention (Exhibit RL49). ↩
68 ILC Yearbook, p.211 (emphasis added) (Exhibit CL46); see also United Nations General Assembly, Sixty-Fifth Session of the International Law Commission, Memorandum by the Secretariat, A/CN.4/658, 2013, ¶¶ 78-79 (Exhibit CL43). ↩
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72. Illustrative of Respondent’s approach is the following:
“As several States have observed during recent discussions of the topic of ‘Provisional application of treaties’ in the Sixth (Legal) Committee of the General Assembly of the United Nations, provisional application raises serious problems in relation to domestic law, including constitutional law. Recourse to provisional application should therefore ‘depend on the specific circumstances and the national legislation of each State.’”69
73. Recent “observations” of “several States”—here carefully selected by Respondent— do not represent international law. That said, there is nothing to the point. This discussion, selectively excerpted and relied upon by Respondent, concerns the principle of provisional application of treaties and the constraints that certain states may face under their domestic constitutional law in consenting to provisional application. It may well be that a state ought not “have recourse to”, i.e. consent to, provisional application of a treaty if its domestic law prevents it from undertaking an international commitment without domestic legislative approval; but that is a consideration for each state when considering whether to agree to provisional application. It lends no support to the notion that treaties may be applied provisionally in part (i.e., piecemeal) depending on how specific treaty provisions match up with national law. Indeed, as the language quoted by Respondent itself emphasizes, it is the “recourse to provisional application” (i.e., resort to it as a matter of principle to apply treaties as a whole) that may depend upon national law. That is precisely why the “to the extent” language is included in Article 45(1) ECT and why signatories were granted the right to expressly opt out—for any reason—by making a declaration under Article 45(2)(a).
74. The central message is conveyed in René Lefeber’s entry “Treaties, Provisional Application” in the Max Planck Encyclopaedia of Public International Law, which updates and expands on his earlier chapter in Essays on the Law of Treaties:
69 Resp. Mem., ¶ 22 (and sources cited therein). ↩
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“Although domestic limitations to the provisional application of treaties may have legal effect at the national level, if a competent organ agrees to the provisional application of a treaty in disregard of such domestic limitations, such disregard will normally not have legal effect at the international level. According to a general rule of international law, which is also laid down in Art. 27 VCLT, a State cannot invoke domestic law as an excuse for non-compliance with international obligations following from a treaty. This is also valid for domestic limitations to the provisional application of treaties, unless the violation of a provision of national law regarding competence to conclude treaties ‘was manifest and concerned a rule of its internal law of fundamental importance’ (Art. 46 VCLT). Pursuant to the second paragraph of Art. 46 VCLT, ‘[a] violation is manifest if it would be objectively evident to any State conducting itself in the matter in accordance with normal practice and in good faith’. Domestic limitations to the provisional application of treaties, such as those listed above, primarily imply that the competent organ should abstain from expressing its consent to be bound to an agreement on provisional application or issue a notification of termination, eg if national time limits have expired. If it does not, it will either have to comply with the treaty or have to face liability for an internationally wrongful act [...]”.70
75. Respondent quotes Lefeber’s statement in his 1998 work that “a treaty may provide that its provisional application is subject to national law . . .”,71 as supporting the broad conclusion that “in the event of a conflict, domestic laws prevail over inconsistent treaty provisions”. The conclusion does not follow from the quoted source and is expressly contradicted by Lefeber’s later, more detailed work. Among other things, the ECT says nothing about provisional application being “subject to” national law and the notion that “domestic law prevails over inconsistent treaty provisions” is flatly contradicted by the views of Lefeber, the Vienna Convention, the Russian Constitutional Court – and Respondent itself (see infra).
76. In directing the Tribunal to the “observations” of “several States” in the recent UN General Assembly Sixth Committee discussions, Respondent also fails to mention that it expressed no concern and identified no “serious problems” with provisional application in those discussions. The Russian Federation delegate simply welcomed
70 Lefeber, R., 'Treaties, Provisional Application', Max Planck Encyclopaedia of Public International Law (2011), ¶17 (“Lefeber 2011”) (emphasis added) (Exhibit CL37). ↩
71 Resp. Mem., ¶ 25, quoting Lefeber 1998, p. 89 (Exhibit RL30). ↩
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the decision of the Committee to request from the Secretariat a special memorandum on provisional application in the Sixty-Seventh Session.72
77. Respondent further fails to mention that the cited discussions informed two reports prepared by Special Rapporteur Juan Manuel Gomez Robledo. In the first, issued in June 2013, the Special Rapporteur noted that:
“On the other hand, the clauses may make provisional application contingent on compatibility with States’ domestic law. Although the issue of domestic law will not be discussed in this report, it is relevant to note that for the purposes of this section, such a condition is irrelevant, provided that the States have freely consented, since the State has expressed its intention to apply the treaty provisionally under the stipulated modalities. Suffice it to note that in principle, domestic law does not constitute a barrier to provisional application.”73
78. The Special Rapporteur observed further in his second report, issued in June 2014 and referring to the determinations of tribunals constituted under the ECT, that “it is undeniable that a commitment to apply a treaty provisionally has legal effects”74 and “this mechanism produces legal effects that entail rights and obligations under international law”.75
79. Moreover:
“In cases where States agree that a treaty is to be applied provisionally from the time of its adoption or signature, the rights enjoyed by States under the treaty will be enforceable from the time of adoption or signature, respectively.
This is clearer still in the case of bilateral treaties in which the parties agree that the treaty is to be applied provisionally prior to its entry into force. The
72 United Nations General Assembly, Sixty-Seventh Session, Summary Record of the 22nd Meeting of the Sixth Committee, 6 November 2012 (A/C.6/67/SR.22), ¶ 98 (Exhibit RL24). ↩
73 United Nations General Assembly, Sixty-Fifth Session of the International Law Commission, First Report by the Special Rapporteur on the Provisional Application of Treaties, A/CN.4/664, 3 June 2013 (“First Report”), ¶ 44 (emphasis added) (Exhibit CL44). ↩
74 United Nations General Assembly, Sixty-Sixth Session of the International Law Commission, Second Report by the Special Rapporteur on the Provisional Application of Treaties, A/CN.4/675, 9 June 2014 (“Second Report”), ¶ 36 (Exhibit CL45). ↩
75 Second Report, ¶ 29 (Exhibit CL45). ↩
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Russian Federation provided some examples of this in the report on its practice [...].76
[...] Given that provisional application produces legal effects and is capable of creating rights and obligations under international law, it may be concluded that a breach of an obligation arising from the provisional application of the treaty will also have legal consequences, including all those established by the law of the State responsibility for internationally wrongful acts.77
80. While the discussions cited by the Respondent are, like the bulk of its submission, academic insofar as the issues before this Tribunal are concerned, they provide further support for Claimant’s interpretation of Article 45(1). In no way can they be said to support Respondent’s.
81. Similarly, Respondent’s reliance on state practice, if anything, supports Claimant’s interpretation of Article 45(1) ECT. Thus, Respondent notes that “[s]everal ECT signatories did not opt out of provisional application pursuant to Article 45(2)(a) ECT, but instead expressly relied upon the ‘to the extent’ clause in Article 45(1) to exclude or limit provisional application”.78 Respondent places Austria, Italy, Luxembourg, Portugal, Romania and Turkey in this category.79
82. Respondent’s submission on this point is accurate with one material exception. These states did not invoke the “to the extent” language to “exclude or limit” provisional application. They invoked that language solely to exclude it; Russia elected not to do so. This state practice thus is consistent with the plain language of Article 45(1) that it is only when provisional application of treaties as a whole is inconsistent with
76 Second Report, ¶¶ 44 and 45 (emphasis added) (Exhibit CL45). ↩
77 Second Report, ¶ 86 (Exhibit CL45). ↩
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national law that a signatory may refuse to so apply the ECT under Article 45(1) (i.e., to exclude it).80
83. Thus, for example, Italy cited constitutional obstacles with respect to the ECT’s specific provisions on arbitration and financial obligations, reminiscent of what Respondent now claims. No suggestion was made that Italy might simply apply the remaining Treaty provisions piecemeal. Instead, in notifying its intention not to apply the ECT, Italy emphasized that in light of these factors it could not accept provisional application “in toto”.81
84. Of course, the one state whose practice matters more than any is Respondent. Nonetheless, Respondent’s memorial is wholly silent on this point. The reason is not difficult to discern.
85. In its Message No. 239 dated 28 April 1994, the Energy Charter Conference Secretariat asked all delegations wishing to make a request to be excepted from provisional application to notify it.82 As the signature and ratification process progressed, the Secretariat continued its efforts to ensure full transparency and drew up a list of signatories that would not apply the Treaty provisionally. Both the preliminary list of signatories issued two days after the signature of the ECT83 and the updated list issued on 1 March 200584 referred to three categories, namely: (i) the “list of signatories which would not apply the Treaty provisionally in accordance with Article 45(1)”- this list included Austria, Hungary, Italy, Luxembourg, Portugal, Romania and Turkey; (ii) the “list of signatories making a declaration that they
80 See also Hulley Enterprises Jurisdiction Award, ¶¶ 321-322 (Exhibit CL9). ↩
81 Letter from Italy to the European Energy Charter Conference Secretariat, 1 September 1994 (Exhibit C141). ↩
82 Message No. 239 from the Energy Charter Conference Secretariat, 28 April 1994 (Exhibit C142); see also Banifatemi Y., ‘Provisional Application of the Energy Charter Treaty: The Negotiating History of Article 45’ in Coop G. (ed.), Energy Dispute Resolution: Investment Protection, Transit and The Energy Charter Treaty (Jurisnet: 2011), (“Banifatemi”), p. 205 (Exhibit CL29). ↩
83 Note from the European Energy Charter Conference Secretariat, Document 41194- CONF 114, 19 December 1994 (Exhibit C143). ↩
84 Updated List of Signatories to the ECT, 1 March 1995(Exhibit C144). ↩
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cannot accept provisional application of the Treaty in accordance with Article 45(2)(a)” - this list included Australia, Bulgaria, Cyprus, Iceland, Liechtenstein, Malta, Poland and Switzerland; and (iii) the “list of delegations which intended, when they sign the Treaty, to make a declaration that they cannot accept provisional application of the Treaty in accordance with Article 45(2)(a)”, namely Norway and Japan.
86. Accordingly, all signatories having any difficulty with provisional application of the Treaty expressed their position, be it pursuant to Article 45(1) or Article 45(2).85 Each did so with respect to provisional application of the ECT as a whole; none suggested it would apply Treaty provisions piecemeal.
87. Russia placed itself on none of these lists. To the contrary, the Russian Federation joined in the following declaration made together with representatives of the other participating states in the Sixteenth Plenary Session of the Energy Charter Conference recorded in the Chairman’s statement at the Adoption Session:
“[...] the Treaty shall be applied and interpreted in accordance with generally recognized rules and principles of observance, application and interpretation of treaties as reflected in Part III of the Vienna Convention on the Law of Treaties of 25 May 1969. In particular in the context of Article 18(2) they recalled that a party may not invoke the provisions of its internal law as justification for its failure to perform a treaty.”86
88. The Russian delegation to the Energy Charter Conference of 17-18 December 2002 then had this to say:
“The Russian Federation views the Energy Charter as an important instrument of international energy cooperation, and reiterates its intention to continue to its participation in the discussions of a wide range of issues related to energy transit, trade, investments and energy efficiency within the framework of the Charter Process.
85 Banifatemi, p.207 (Exhibit CL29). ↩
86 The Chairman’s statement recording the declaration is included in the official Secretariat publication of The Energy Charter Treaty and Related Documents, pp.157-8 (emphasis added) (Exhibit C1), but see also the original in the Note from the European Energy Charter Conference Secretariat, Document 42/94-CONF 115, 6 January 1995, p.4 (Exhibit C145). ↩
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The Russian Federation has yet to ratify the Energy Charter Treaty, but as a Signatory Country, it implements the Treaty from the day it entered into force.”87
89. Similarly, the website of the Ministry of Foreign Affairs of the Russian Federation contained an information bulletin on the ECT as late as 23 May 2007 confirming that “the Russian Federation applies [the ECT] on a provisional basis in accordance with Part II of the Vienna Convention on the Law of Treaties (1969) and Section II of the Federal Law on International Treaties of the Russian Federation of June 16, 1995.”88
90. Accordingly, consistent with the proper interpretation of Article 45(1) ECT, Russia at all relevant times made clear that it was provisionally applying “the Treaty”, not merely some unidentified part of it. It cannot now be heard to say that its statements were false and misleading and, in fact, it was not applying material provisions of the Treaty. Respondent’s reliance on state practice other than its own, which supports Claimant’s interpretation in any event, should be seen for what it is. Its revisionist interpretation that, conveniently, finds the Article 26 ECT right to arbitrate somehow inconsistent with Russian law (itself a baseless proposition as discussed below), was adopted as a matter of expediency to avoid being held to account for its unlawful actions.
91. Respondent submits that “State practice confirms that a signatory is entitled to involve the consistency of specific provisions of the ECT”89 with its law. However, it cites the “practice” of only one state, Finland, relying on what appears to be an internal Finnish document from 1997 and a November 1994 memorandum provided prior to signature of the ECT.90 Obviously, neither of these documents do or can provide evidence of “any agreement” between the parties or an instrument accepted
87 Statement by the Delegation of the Russian Federation to the Energy Charter Conference, 17-18 December 2002 (Exhibit C118). ↩
88 Information Bulletin on the Energy Charter Treaty, official website of the Russian Federation Ministry of Foreign Affairs, 25 November 2005 (Exhibit C119). ↩
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by the other parties on signature or any “subsequent agreement” or “practice” establishing the agreement of the parties for purposes of Article 31 of the Vienna Convention.
92. The reference to the 1994 Joint EC Statement does not support the argument for the reasons given below and the quotation of a statement by the German government is from 2014 draft guidelines on the Treatment of International Treaties, which self-evidently has nothing to do with the ECT and tells us nothing about German practice applying the ECT prior to its entry into force for Germany. Nor do the other statements quoted by Respondent, from the UK and the Energy Charter Secretariat,91 meet the requirements of Articles 31(2) or (3); they are, in any event, consistent with Claimant’s interpretation.
93. As the Hulley Enterprises Tribunal observed:
“Respondent has not, however, provided any evidence that France, Finland or Germany represented to its counterparts, at the time of the negotiation of the Treaty, that it understood Article 45(1) as meaning that it could rely at any time on this provision in order to single out for exclusion individual ECT provisions that were ‘inconsistent’ with its domestic law, or that its obligations under the ECT would be restricted in any manner”.92
94. Respondent places heavy reliance on the 1994 Joint EC Statement issued by the European Community and its Member States.93 This argument was aptly dismissed by the Hulley Enterprises Tribunal as follows:
“The Tribunal finds this argument unpersuasive:
First, even if the 1994 EU Joint Statement could be said to support Respondent’s position, the weight of State practice, as demonstrated above, supports Claimant’s position – namely that the Limitation Clause in Article
91 Resp. Mem., ¶¶ 49-50. Indeed, in the same document relied on by the Respondent, the Energy Charter Secretariat Annual Report 2006, p.5 (Exhibit RL44), the Secretariat states that “[t]he Russian Federation appl[ies] the Treaty on a provisional basis”, without any qualification as to the “to the extent” clause. ↩
92 Hulley Enterprises Jurisdiction Award, ¶ 324 (Exhibit CL9). ↩
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45(1) has been used as the basis for opting out of the provisional application of the Treaty altogether.
Second, and even more important, the Tribunal does not find that the 1994 EU Joint Statement supports Respondent’s position. The 1994 EU Joint Statement does not say, and cannot be read as meaning, that certain elements of the ECT will not be provisionally applied by the European Community because they are inconsistent with the Community’s internal legal order. The 1994 EU Joint Statement, rather, says that Article 45(1) ‘does not create any commitment beyond what is compatible with the existing internal legal order of the Signatories.’ On this basis, the 1994 EU Joint Statement concludes that the European Community can safely sign the ECT, and accept the obligation of provisional application, without taking on any obligation to do anything that is beyond its competence. This is therefore not so much an example of partial provisional application of the ECT due to inconsistency with the EC’s legal order, as it is an example of the EC’s partial jurisdiction for the provisional application of the whole ECT – meaning necessarily, that some parts of the ECT simply cannot be provisionally applied by the EC.
Third, the 1994 EU Joint Statement entered into the minutes has no legal or binding value, as opposed to the Council decisions themselves. The Tribunal notes that the preamble of the Council decision in respect of the provisional application of the ECT by the European Community does not refer to Article 45(1) of the ECT or the notion of partial provisional application due to inconsistency. Rather, the Council decision focuses on the partial competence of the European Community for the matters covered by the provisional application of the Treaty:
Whereas the provisional application of the Energy Charter Treaty will help attain the objectives of the European Community;
Whereas the European Community has competence for parts of the Energy Charter Treaty;
[. . .]
The European Community shall apply on a provisional basis from the time of signature the Energy Charter Treaty to the extent that it has competence for the matters governed by the Treaty.
[emphasis added]
Finally, the Tribunal notes that the Council Legal Service considered the interpretation of Articles 45(1) and (2) included in the 1994 EU Joint Statement to be ‘restrictive and possibly unilateral’ and cautioned that the
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interpretation could ‘create a problem of transparency in relation to other negotiating Parties.’”94
95. The remaining supplemental authorities cited by Respondent95 have little persuasive value. As regards the article published in 2006 by Mr. Craig Bamberger, the former Chairman of the Legal Advisory Committee, on the application of the ECT’s dispute resolution provisions in energy transit disputes, it provides little or no support for the Respondent’s argument. Whatever view Mr Bamberger may have held on the meaning of Article 45(1) in the course of his work (and the 2006 article does not address this question), is immaterial; what counts for the purposes of interpreting Article 45(1) is the final text, the practice of the States parties falling within one of the categories in Article 31(2)(a)-(b) and (3)(a)-(b) of the Vienna Convention but more importantly the Respondent’s own practice. As set out above, these support the Claimant’s interpretation.
96. The opinions of publicists as to the interpretation of a treaty are not supplementary means of treaty interpretation. This applies with even greater force to the Loibl article quoted by Respondent96. Mr Loibl’s quoted chapter does not purport to undertake an analysis of the text in light of the practice of the signatories (which he does not refer to), but rather proffers his subjective opinion based upon a general discussion of the relationship between domestic law and international law and the difficulties that some States may face in complying with an agreement to provisionally apply a treaty because of their domestic law.97 “Opinions” such as these are worthy of no consideration by this Tribunal.
94 Hulley Enterprises Jurisdiction Award, ¶ 327 (Exhibit CL9). ↩
95 See Resp. Mem., ¶¶ 50-52. ↩
97 Gerhard Loibl, The Energy Charter Treaty: Implementation And Compliance Issues, in The Energy Charter Treaty: An East-West Gateway For Investment And Trade (Thomas W. Wälde, ed. 1996), pp. 578-579 (Exhibit RL32). ↩
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97. Even if Article 45(1) ECT permits the piecemeal approach to provisional application advocated by Respondent, Article 26 ECT is not inconsistent with Russian law for at least two reasons: (i) where Russia has consented to be bound, international treaties of the Russian Federation are made part of Russian law pursuant to its Constitution and take priority over domestic law (i.e., the “conflict” posited by Respondent cannot exist as a matter of Russian law); and (ii) the Article 26 ECT dispute resolution provisions are in any event not inconsistent with any provision of Russian law. We address each point below.
98. As is well known, States may express their consent to be bound by a treaty “by signature, exchange of instruments constituting a treaty, ratification, acceptance, approval or accession, or by any other means if so agreed.”98 A treaty that makes provision for “ratification, acceptance or approval” essentially sets up a two-stage process which has to be satisfied before it will come into force, both as a whole and for each contracting state: the first step is conclusion and signature of the treaty by the negotiating states; the second is the exchange or deposit with the depository state of instruments of ratification, accession or approval. This two-step process allows States to reconcile the practical need for delegations to be able to negotiate treaty texts with the need for time to reflect on a final text or, in accordance with any constitutional requirements, to secure parliamentary or other approval necessary under domestic law. Some States’ domestic law refers to the domestic law process of approving an international treaty as “ratification” (referred to here as “domestic ratification”).99
98 Article 11, Vienna Convention (Exhibit RL49). ↩
99 See, e.g., Russia’s FLIT (Exhibit R24). ↩
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99. Although the terminology of “ratification” may be used by States’ domestic law, ratification of a treaty in international law is an international law process, not a domestic one. By way of illustration, if an official of State X ‘on a frolic of her own’ ratified a treaty requiring “ratification, acceptance or approval” without adhering to the requirements of State X’s domestic law as to when she would be entitled to do so (e.g. after a vote by a legislative assembly), State X would nevertheless be bound by that treaty unless the official’s lack of authority was “manifest”.100 This reflects the fundamental principle of international law that a State may not rely on the provisions of its internal law to justify breaches of international law.101 State X’s failure to implement the treaty into domestic law by domestic ratification or implementing legislation, which may be necessary in order to comply with its substantive obligations under the treaty,102 will put it in breach of its treaty obligation and thus engage its responsibility under international law.
100. Each state has different domestic law rules as to (i) approval or domestic ratification requirements (if any) of an international treaty prior to its ratification and acceptance or approval on the international level, (ii) powers the executive may exercise on the international plane without the involvement of the legislature; and (iii) how treaties become part of domestic law (where this is necessary to perform the treaty obligations).103
100 Article 46, Vienna Convention (Exhibit RL49). ↩
101 Crawford J., Brownlie’s Principles of Public International Law (8th ed., OUP: 2012), pp. 51-52 (Exhibit CL32), reflected in Articles 27 and 46, Vienna Convention (Exhibit RL49) and Article 3, International Law Commission’s Draft Articles on the Responsibility of States for Internationally Wrongful Acts (2001) and commentaries thereto, reproduced in Crawford, J. (ed.), The International Law Commission’s Articles on State Responsibility: Introduction, Text and Commentaries (CUP: 2002), pp.86-90 (Exhibit CL33). ↩
102 For example obligation in Article 14(1) of the Convention Against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment, 1984 to: “ensure in its legal system that the victim of an act of torture obtains redress and has an enforceable right to fair and adequate compensation [...]” (Exhibit CL49). ↩
103 By way of example, in common law systems there may be no requirement in domestic law for a parliamentary process to be followed or express approval of a treaty requiring ratification/acceptance/approval prior to the lodging of an instrument of ratification/acceptance/approval or notification of such, but, subject to some exceptions, a treaty will not be given effect in domestic law until it is implemented by legislation. Thus, in order to avoid the situation where a treaty obligation is assumed but unable to be complied with because of a lack of (Cont’d on next page) ↩
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101. Not all treaty obligations require incorporation into domestic law to be complied with. Whether a treaty obligation requires the treaty to be implemented into the domestic law of each signatory state or otherwise approved by the legislature in order for that State to meet its obligations on the “international plane” will depend on the treaty provision in question and the domestic law of that State. Relevant factors include:104 whether the obligation in question already falls within the power of the executive under domestic law, whether the treaty obligation operates only on the international plane or requires implementation into domestic law in order to be effective, whether there is already domestic legislation in place that is compliant with the treaty obligation,105 and whether the treaty obligation only requires a change in administrative policy or process that can be effected by government without changing domestic law.
102. Here, as discussed above, under Russian domestic law the authority to sign international treaties on behalf of the Russian Federation rests with the executive branch (Article 11 of the FLIT) and such signature will operate to express Russia's consent to be bound (Article 6(1) of the FLIT). These principles are enshrined in Article 86 of the Russian Constitution.106 Moreover, under Russian law an international treaty may be applied provisionally “if the treaty itself so provides . . . .” and decisions on provisional application by the Russian Federation “shall be made by the body that has taken the decision to sign the international treaty according to the procedure set out in Article 11 of this Federal Law.”107
(Cont’d from previous page)
implementing legislation it is said to be desirable to ensure that implementing legislation is enacted by the time the treaty enters into force: see Aust, A., Modern Treaty Law and Practice (3rd ed, CUP: 2013), p. 161 (Exhibit CL28).
104 See for example Mathy D., ‘Article 25’ in Corten and Klein (eds.), The Vienna Convention on the Law of Treaties (OUP: 2013), Vol. 1, p. 645, ¶ 10 (Exhibit CL38). ↩
105 Lefeber 1998, p. 91 (Exhibit RL30). ↩
107 Article 23(1) and (2), FLIT (Exhibit R24). ↩
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103. The Respondent does not dispute, nor could it, that then President Yeltsin properly exercised his signature authority in binding Russia to provisional application of the ECT.108
104. One effect of that act was to make the ECT part of Russian law. Article 15(4) of the Russian Constitution provides that:
“The universally-recognised rules of international law and international treaties of the Russian Federation shall be a component part of its legal system. If an international treaty of the Russian Federation provides for other rules than those envisaged by law, the rules of the international treaty shall be applied”.109
105. Treaties become incorporated into Russian law at the time of expression of valid consent; the Russian Federation is not a state where a separate incorporating act of a legislative or administrative nature is necessary.110
106. Treaties applied provisionally are subject to no different treatment.111 Indeed as emphasised by the Russian Constitutional Court and quoted previously above:
“Agreement to provisional application of an international treaty means that it becomes part of the legal system of the Russian Federation and must be applied on the same basis as international treaties that have entered into force (unless otherwise expressly stated by the Russian Federation), since otherwise, provisional application would be meaningless. That is why neither the Vienna Convention on the Law of Treaties nor the Federal Law “On International Treaties of the Russian Federation” contains any exemptions from pacta sunt
109 Constitution of Russian Federation, Article 15(4) (Exhibit R21). ↩
110 See Russian Federation Country Report, in Council of Europe (ed.), Treaty-Making – Expression of Consent By States To Be Bound By A Treaty, (Kluwer Law International: 2001) p. 244-245. (Exhibit CL42). ↩
111 Stephan Rep., ¶ 29; see also Judgment of the High Arbitrazh Court of Russian Federation No. VAS-13594/09 re Case No. A40-46399/08-29-480 (December 7, 2009) (Exhibit C146) ↩
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servanda with respect to provisional application of international treaties [...]”.112
107. Thus, as Professor Stephan observes:
“In other words, international treaties of the Russian Federation, as a matter of Russian constitutional law, form a part of Russian law, and the terms of such treaties apply in lieu of the rules provided by domestic law. For this reason, the idea that the terms of an international treaty to which Russia has consented to be bound could be inconsistent with provisions of Russian domestic law is mistaken. This point applies to all treaties, including those that apply provisionally”.113
108. In sum, the “inconsistency” advanced by the Respondent cannot exist as a matter of Russian law.
2. There is No Inconsistency in Any Event
109. Respondent bears the burden of demonstrating how Article 26 ECT is inconsistent with Russian law.114 This assumes it is entitled to invoke piecemeal provisional application (it is not) and that Article 26 does not take priority over any allegedly inconsistent provisions of Russian law as a matter of Russian constitutional law (which it does).
110. Regardless, Respondent cannot seriously suggest to this Tribunal that there is any inconsistency. While Respondent ignores the point (like all others unhelpful to its case), the Government of the Russian Federation sought ratification of the ECT in the State Duma of the Federal Assembly of the Russian Federation. As part of that process, and pursuant to Article 16(4) of the FLIT, the Government is required to issue a determination that the treaty in question conforms with Russian law.
112 Judgment 8-P, pp. 8-9 (emphasis added) (Exhibit R35); see also Hulley Enterprises Jurisdiction Award, ¶ 334 (admission by Russia’s counsel that “Russian law is of course familiar with the concept of provisional application, and that was never in dispute”) (Exhibit CL9). ↩
114 Kardassopoulos, ¶ 229 (Exhibit CL11). ↩
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111. The Russian Government issued the following determination (i.e., the ECT Explanatory Note) with respect to the ECT:
“Prior to the entry into force of the ECT, the majority of the Contracting Parties agreed to apply the treaty on a provisional basis. In this respect, it was decided that such provisional application of the ECT would be implemented to the extent that it would not be inconsistent with the constitution, laws and regulations of the country in question.
At the time for the signing of the ECT, its provisions on provisional application were in conformity with the Russian legal acts. For that reason, the Russian side did not make declarations as to its inability to accept provisional application (such declarations were made by 12 of the 49 ECT signatories).
[...]
The provisions of the ECT are consistent with Russian legislation.
[...]
The legal regime of foreign investments envisaged under the ECT is consistent with the provisions of the existing Law of the RSFSR on Foreign Investments in the RSFSR, as well as with the amended version of the Law currently being discussed in the State Duma, and does not require the acknowledgement of any concessions or the adoption of any amendments to the abovementioned Law. The ECT is also consistent with the provisions of Russian bilateral international treaties on the promotion and protection of investment.”115
112. That should be the end of the matter insofar as any so-called “inconsistency” is concerned.
113. Respondent’s “inconsistency” case is made through the expert report of Professor Anton V. Asoskov.116 In this regard, Respondent has apparently abandoned the reliance placed on a virtual army of experts in the Hulley Enterprises case in favour of
115 Explanatory Note to the Draft Federal Law “On Ratification of the Energy Charter Treaty and the Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects” (the “ECT Explanatory Note”), pp. 1, 4 (emphasis added) (Exhibit C147). ↩
116 Expert Report of Professor A.V. Asoskov dated 28 July 2014 (“Asoskov Rep.”) ↩
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Professor Asoskov, who was not an expert in that case. The position as put this time around fares no better.
114. It should be noted that the fault lies more with Respondent than Professor Asoskov. The fundamental flaw is revealed in the question he was asked to address:
“Does Russian law authorize or permit the arbitration of disputes concerning (i) taxation measures, (ii) enforcement measures related to tax assessments; and (iii) bankruptcy matters?”117
115. Professor Asoskov answers this question by pointing out that, as a matter of Russian private law, disputes “arising out of administrative or other public law relations” cannot be arbitrated and, therefore, because disputes about taxes, their enforcement and bankruptcy arise out of administrative or public law relations, they cannot be arbitrated.
116. As Respondent, and certainly its eminent counsel, appreciate, these views of Professor Asoskov are completely and utterly beside the point. The “laws” invoked by Asoskov concern arbitration in Russia within its domestic legal system. However, the rights – both substantive and in respect of the settlement of disputes in Article 26 ECT – that the Claimant is seeking to enforce “arise under the treaty and are interpreted according to public international law”.118
117. Thus, Article 26 ECT operates on the international plane, in the international legal system. By virtue of Article 26(2)(c) the “Investor party to the dispute may choose to submit it for resolution: (a) to the courts or administrative tribunals or the
118 McLachlan, C., Shore, L. and Weineger, M., International Investment Arbitration: Substantive Principles (OUP: 2007), ¶ 3.51(1) (Exhibit CL39); see also Douglas, Z., The International Law of Investment Claims (CUP: 2009) (“Douglas”), Rule 10 and ¶ 141 (Exhibit CL35). The distinction between rights operating on the “international plane” as distinct from domestic law is reflected in various investment treaty arbitral awards and ad hoc annulment committee decisions under ICSID: see for example Compañía de Aguas del Aconquija SA and Vivendi Universal (formerly Compagnie Générale des Eaux) v. Argentine Republic, ICSID Case No. ARB/97/3, Decision on Annulment, 3 July 2002 (Fortier, Crawford, Fernández Rozas), ¶¶ 95-102 (Exhibit CL6); GAMI Investments, Inc. v. Government of the United Mexican States, UNCITRAL, Final Award, 15 November 2004, ¶ 41 (Exhibit CL7). ↩
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Contracting Party to the dispute... or (c) in accordance with the following paragraphs of this Article” (i.e. Article 26(4)), which allows the Investor to submit the dispute to ICSID arbitration, or arbitration under the UNCITRAL Rules, or to an arbitral proceeding under the Arbitration Institute of the Stockholm Chamber of Commerce. Article 26 does not require implementation into Russian domestic law to be operative, nor to be complied with by Russia.
118. Professor Stephan offers the following observations:
“At the heart of the question of the ECT’s provisional effect with respect to Russia is the status of arbitration agreements under Russian law. Russian law limits the capacity of private persons to contract for arbitration, as does the law of every jurisdiction with which I am familiar. These limits reflect a fundamental feature of contract law, namely that norms of public law are peremptory and that as a result private persons may not contract around them. Although some jurisdictions, such as the United States, allow parties to submit some public-law questions to an arbitral tribunal, these states also make clear that the resolution of such questions by an arbitral tribunal does not bind the courts or otherwise limit the ultimate authority of the judiciary conclusively to resolve such questions with respect to the dispute at hand. E.g., Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc., 473 U.S. 614, 637 n. 19 (1985).
Russian law does not extend the civil-law principle limiting the freedom of contract enjoyed by private persons to official actors acting in their public law capacity, and in particular does not limit the power of the President of the Russian Federation in this manner. The authority of the President to make treaties under Article 86 or adopt orders and decrees under Article 90 comprises the authority to constitute a dispute settlement procedure encompassing matters over which the President has competence. When exercising this authority, the President is not acting like a private person exercising the freedom of contract, but rather as a component of the Russian state endowed with lawmaking authority. Civil-law restrictions on the freedom of legal persons to contract simply do not apply to the President when he acts in his official and public law capacity.
Official actors may exercise rights under private law, as when a municipality contracts to buy or sell some good or service. See Civil Code of the Russian Federation Articles 2(1) (stating that the Russian Federation and other state organs ‘also participate in relations regulated by civil legislation’); 48(2) (providing that state enterprises and institutions can be legal persons that possess civil-law rights and duties); Articles 113-15 (specifying civil-law rights and duties of state enterprises); Article 121 (specifying civil-law rights and duties of institutions); Articles 124-17 (specifying civil-law rights and
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duties of state organs). In these instances, the rules of private law, including limitations on the power to contract for arbitration, apply. But the ability of state organs to exercise civil-law rights and duties does not mean that they act only in this capacity. To the contrary, when they act in their official and public capacity as authorized by the Constitution and Russian legislation, the rules of civil law, including the limitations contained therein, do not apply.
For these reasons, the materials reviewed by Professor Asoskov in ¶¶ 12-29 of his expert report are irrelevant to the question under consideration here. Resolution 10-P of the Constitutional Court, dated May 26, 2011, dealt with the capacity of private persons to contract for arbitration. The matter before the High Arbitrazh Court, for which that Court sought constitutional guidance from the Constitutional Court, involved a dispute between private parties. The authority of components of the Russian state to contract for arbitration regarding matters within that component's competence was not an issue in the dispute.
Similarly, each of the statutes discussed in Professor Asoskov's report (the 1993 International Arbitration Law, the 1962 Civil Procedure Code, the 1992 Arbitrazh Procedure Code, the 1992 Provisional Regulation, the 1995 Arbitrazh Procedure Code, the 2002 Arbitrazh Procedure Code, the 2002 Law on Arbitral Tribunals, and the 2002 Civil Procedure Code) address only arbitration contracts entered into by private parties, or by official actors exercising rights and duties under private law. None of these statutes purports to limit in any fashion the authority of the President acting in his official and constitutional capacity to enter into agreements on behalf of the Russian Federation.
All of the instances cited in ¶¶ 30-47 of Professor Asoskov's report entail limitations on the freedom of contract otherwise enjoyed by private persons under the Civil Code, as well as by official actors exercising rights under private law. For example, the court decisions discussed in ¶¶ 45 and 46 of the report each involved contracts between private actors and a public body. In each case, the contract was governed by the Civil Code and other legislation regulating contracts. In each case, the court determined that a public body, exercising its capacity as a legal person under the Civil Code, could not contract for arbitration of disputes in circumstances where private actors could not. Neither case addressed the constitutional or legislative authority of the public bodies to adopt rules of public law.”119
119. Thus:
“As noted above, the capacity of both private persons and official bodies, exercising rights under the Civil Code, to contract for arbitration is limited.
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This feature of Russian law has nothing to do with the capacity of public actors, as a matter of public law, to enter into binding agreements to submit compensation claims to arbitration. As is evident from Russia's treaty practice, the Russian state clearly has the authority to enter into such agreements. This practice demonstrates the inapplicability of private-law restrictions, such as those cited by Professor Asoskov, to the lawful public acts of Russian lawmakers. In particular, these treaties indicate that the invalidity of private law contracts to arbitrate claims for compensation due to the wrongful acts of state officials does not contradict, within the meaning of Article 86 of the Russian Constitution, the authority of the President to sign treaties binding the Russian Federation to such arbitration for public purposes.”120
120. Professor Stephan explains further as follows:
“Professor Asoskov's argument confuses the distinction between the validity and legality of an official act. An international arbitral tribunal has no power to cancel a tax assessment or penalty. Rather, its assessment of a claim of a violation of an internationally protected interest must assume that the assessment occurred and resulted in harm to the protected interest. In other words, the tribunal cannot award damages unless it has determined that the acts of the tax authorities have been fully consummated within the domestic legal order and have been conclusively determined to have taken effect, i.e., that they are valid as a matter of Russian law. Only then can the tribunal determine whether those acts, once consummated, resulted in an injury for which international law requires compensation.
A determination that a domestic official act, valid under a state's domestic law, harms an internationally protected interest for which compensation is required thus confirms, rather than denies, the validity of the official act. A claim for compensation based on a treaty violation, such as that brought by Yukos Capital S.a.r.l. in the present matter, does not transgress the general rule under Russian law that only Russian courts may determine the validity of the acts of Russian tax officials. Rather it reflects the fact that Russia has obligated itself to compensate for injuries caused by legally valid domestic acts that violate treaty-based substantive rules with which Russia has agreed to comply.
The several investment treaty claims brought against Russia for injuries caused by acts of the tax authorities illustrate the distinction between review of the validity of official acts and determination of the legality of those acts under international law. In the claims brought by British and Spanish shareholders of Yukos OAO under the respective investment treaties, as well
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as the claims brought by various shareholders under the ECT,121 the Russian Federation raised many challenges to the jurisdiction of the tribunals. To the best of my knowledge, however, the Russian Federation never argued that a claim based on an injury to an internationally protected interest caused by a domestic tax invaded the exclusive right of Russian courts to review the validity of the acts of tax officials.
In sum, the exclusive competence of Russian courts to determine the validity of official acts of Russian tax authorities does not limit in any way the authority of the Russian President, under Article 86 of the Constitution, to make international agreements that provide for arbitration of claims for compensation based on an injury to an internationally protected interest, even if actions of tax authorities contributed to the injury.”122
121. Again, Respondent and its counsel unquestionably know this. Article 26 ECT presents no inconsistency with any provision of Russian law.
122. Far from any inconsistency, Russian law positively recognizes that disputes under public international law instruments may be resolved by arbitration. As Professor Stephan notes:
“In ¶¶ 74-111 of his report, Professor Asoskov discusses the 1991 Fundamentals of Legislation on Foreign Investments in the USSR (the “Fundamentals”), the 1991 Law of the RSRSR No. 1545-1 on Foreign Investment in the RSFSR (the “1991 Law”), and the 1999 Federal Law No. 160-FZ on Foreign Investments in the Russian Federation (the “1999 Law”). Of these three, only the 1991 Law was indisputably in force in Russia in 1994. The 1991 Law displaced the Fundamentals, a product of the no longer extant U.S.S.R. The 1999 Law had not been enacted. For present purposes, however, these differences in applicability to this dispute are insignificant.
Article 43 of the Fundamentals provides that disputes between investors and the state shall be resolved by U.S.S.R. court which had ceased to exist no later than December 25, 1991 ‘unless otherwise provided by international treaties of the USSR.’ Article 9 of the 1991 RSFSR Law designates the then-top courts in the R.S.F.S.R., as the proper jurisdiction for considering ‘investment disputes,’ unless ‘another procedure is established by an
121 Citing Quasar de Valores SICA V S.A. v. Russian Federation, Arbitration Institute of the Stockholm Chamber of Commerce, Award on Preliminary Objections, March 20, 2009 (Exhibit PBS6); RosInvestCo UK Ltd. v. The Russian Federation, SCC Case No. V079/2005, Award on Jurisdiction, 1 October 2007 (Exhibit PBS7); Hulley Enterprises Jurisdiction Award (Exhibit PBS8). ↩
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international treaty in force in the territory of the RSFSR.’ Article 10 of the 1999 Law authorizes dispute resolution ‘in accordance with international treaties of the Russian Federation and federal laws in courts, arbitrazh courts or through international arbitration (arbitral tribunal).’
A common thread in each of these provisions is recognition that the Russian state could commit itself by a treaty to investor-state arbitration. None of these enactments limits its effect to treaties that required legislative acts to come into force with respect to Russia. To the extent a treaty can come into force through provisional application upon the signature of the President, any of the three measures would include that treaty as one ‘in force in the territory of the RSFSR.’”123
123. Again as summarized by Professor Stephan:
“An agreement by the Russian President to bind the Russian Federation to arbitration of disputes regarding a specified set of transactions, does not contradict the Russian Constitution or any relevant Russian legislation. In particular, no Russian statute in effect as of December 17, 1994, the date of the signature of the ECT, barred or directly contradicted any such agreement.”124
124. Respondent has cobbled together a wholly unpersuasive argument that its failure to submit the ECT for ratification within six months of signature somehow terminated provisional application.
125. As best Claimant can understand it, the argument goes that: (i) the ECT was subject to mandatory ratification pursuant to Articles 10 and 106(d) of the Russian Constitution because Article 26 ECT “amend[ed] or supplement[ed] existing laws;125 (ii) Article 23(1) of the FLIT, which essentially restates Article 25(1) of the Vienna Convention, provides for provisional application where a treaty so provides (as the ECT does
125 Resp. Mem., ¶¶ 56-58, 62. Domestic ratification is not required for all treaties; it depends on whether they fall within the scope of Articles 15(1) and 15(2) of the FLIT. ↩
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here);126 (iii) Article 23(2) of the FLIT requires that where treaties are being applied provisionally, they must be submitted to the State Duma for ratification within six months of signature;127 (iv) the same statutory provision provides that to prolong provisional application beyond six months requires “a decision taken in the form of a federal law”;128 and (v) “[p]rovisional application of Article 26 ECT, at least beyond six months, is therefore inconsistent with Respondent’s ‘constitution’ and ‘laws’ for purposes of Article 45(1) ECT”.129
126. This argument is wrong on numerous counts.
127. First, as discussed above, Article 26 ECT did not require the amendment or supplementation of existing Russian law. To the contrary, by President Yeltsin’s signature expressing Russia’s consent to be bound, Article 26 ECT became part of Russian law by operation of the Russian Constitution. In this respect it was fully consistent with numerous Russian laws and international treaties providing for, or providing for the possibility of, the arbitration of public international law disputes. Accordingly, ratification was not mandatory as a matter of Russian law.
128. This possibility was recognized by signatory States in Understanding 16 of the ECT:130
“With respect to Article 26(2)(a)
Article 26(2)(a) should not be interpreted to require a Contracting Party to enact Part III of the Treaty into its domestic law.”
129. And, as the Russian Government itself emphasized to the State Duma:
129 Resp. Mem., ¶ 64 (emphasis in original). ↩
130 “By signing the Final Act, the representatives agreed to adopt the...Understandings with respect to the Treaty”, ECT p. 25, Final Act of the European Energy Charter Conference (Exhibit C1). ↩
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“At the time of the signing of the ECT, its provisions on provisional application were in conformity with the Russian legal acts. For that reason, the Russian side did not make declarations as to its inability to accept provisional application (such declarations were made by 12 of the 49 ECT signatories).
[...]
The provisions of the ECT are consistent with Russian legislation.”131
130. Second, the six month rule found in Article 23(2) of the FLIT did not exist when the ECT was signed by President Yeltsin on behalf of Respondent. Given that the FLIT was not implemented until after the conclusion of the ECT in December 1994 there could have been no question of any “internal law” limitation on the competence of Russia to agree to provisional application under Article 46 of the Vienna Convention.132
131. Third, even if it could be applied retrospectively (and it cannot),133 any reliance on the six-month rule found in Article 23(2) of the FLIT would violate Russia’s obligations under Article 27 of the Vienna Convention, which provides that “[a] party may not invoke the provisions of its internal law as justification for its failure to perform a treaty”.134 As discussed previously, Russia’s Constitutional Court has confirmed and fully embraced this principle135 and the six-month rule is quintessentially a provision of Respondent’s internal law.
132. Fourth, any failure to comply with Article 23(2) of the FLIT can have no effect on Russia’s international obligations as a signatory to the ECT to apply the treaty provisionally. This is recognized by the terms of Article 23(2), which provides:
131 ECT Explanatory Note, pp. 1, 4 (Exhibit C147). In this regard, Respondent’s reliance on the explanatory notes from two different treaties (i.e., the Russia-Argentina and Russia-South Africa BITs) (see Resp. Mem., ¶¶ 62-63) is entirely misplaced and irrelevant. ↩
132 Hulley Enterprises Jurisdiction Award, ¶¶ 343-344 (Exhibit CL9); see also Stephan Rep., ¶¶ 66-72. ↩
135 Judgment 8-P (Exhibit R35). ↩
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“Unless the international treaty provides otherwise, or the respective States otherwise agree, the provisional application by the Russian Federation of a treaty or a part thereof shall be terminated upon notification to the other States that apply the treaty provisionally of the intention of the Russian Federation not to become a party to the treaty” (emphasis added).
133. Respondent fully appreciated this fact, communicating its termination of provisional application by a notification to the ECT depository on 20 August 2009.136
134. A similar position would arise if the question was whether Russian domestic law required ratification of a treaty, a question for the Constitutional Court. W.E. Butler, the well-known expert in Russian law and its legal system, has explained the position as follows:
“Should a dispute arise between the legislative and executive branches as to whether a particular treaty is subject to ratification, the dispute is subject to resolution in the Constitutional Court of the Russian Federation. The question before the Constitutional Court would be to determine whether a particular agency had the right to give consent to the treaty entering into force for the Russian Federation. If the Constitutional Court were to give a negative decision, this agency would be obliged to take measures in accordance with the provisions of the treaty and international law to terminate the treaty or to change it.”137
135. This reflects the fundamental principle found in Article 25(2) of the Vienna Convention that a State that has consented to be bound by a treaty provisionally is bound by that obligation as a matter of international law until such time as it terminates that obligation.138 In this case, other signatory States cannot be taken to know whether, as a matter of the operation of Russia’s domestic law, the Duma has
136 Notification by Russian Federation to Portuguese Republic pursuant to Article 45(3)(a) of the ECT, 20 August 2009 (Exhibit R5). ↩
137 Butler, W. E., ‘National Treaty Law and Practice: Russia’, in Hollis, D. B., Blakesee, M. R. and Ederington, L. B. (eds.), National Treaty Law and Practice (Martinus Nihoff: 2005), pp. 537-580, at p.545 (emphasis added) (Exhibit CL30). See also Lefeber 2011, ¶ 17 (failure to take required domestic steps to implement a treaty will place the state in breach of its international obligation of provisional application) (Exhibit CL37). ↩
138 And understood by the Russian Constitutional Court: see fns. 64 and 112 above. ↩
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acted or failed to act under Article 23(2) of the FLIT.139 To make the outcome of its domestic constitutional process effective on the international plane, Russia must take the step on the international plane of terminating its obligation to provisionally apply the treaty.
136. Thus, even if Respondent is correct in its assertion that the ECT was subject to domestic ratification as a matter of Russian domestic law, the relevant State agency was obliged to terminate its provisional application in accordance with the terms of the ECT and international law. That is, the termination of the international obligation would not be “automatic”. Respondent did not do so until 20 August 2009.
137. Respondent has always known this and its submissions on this point are lacking in candour. Thus, among other things, the Russian Government prepared a Note on the “Legal Aspects of the Provisional Application of International Treaties in the Territory of the Russian Federation” dated 8 July 1997 that was issued shortly after ratification of the ECT was postponed by the Duma.140 Therein, Respondent made clear that provisional application does not terminate automatically if the six month rule is violated and that there can be no consequences under international law due to the lack of such ratification:
“Firstly, if the treaty is not submitted to the State Duma during the specified period this cannot lead to the automatic termination of its provisional application. It would have contradicted Art. 23 of the Law as well as Art. 18 of the Vienna convention under which, in order to terminate provisional application, it is necessary to make the intention clear not to become a party to the treaty. Such an intention does not result from the fact of not submitting the treaty to the State Duma. The only possible issue here is the breach of the
139 Similarly, whether the domestic law of a particular state requires domestic ratification of the treaty in question may not be an easy question for other States to understand, especially where the domestic law provision is complex and may have been subject to subsequent judicial decisions and legislation which affect its interpretation and application. It is for this reason that action is required in the international plane. ↩
140 Note on the Legal Aspects of Provisional Application of International Treaties in the Territory of the Russian Federation, 8 July 1997; Energy Charter Secretariat, List of Participants in the Charter Conference, 8 July 1997 (“Russian Note on Provisional Application”) (Exhibit C148). ↩
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Federal Law. However, this can have no automatic consequences of an international legal nature.”141
138. That, yet again, should be the end of the matter insofar as this point is concerned.
139. As Professor Stephan explains:
“Finally, even if Article 23(2) of the FLIT applied, failure to comply with its terms does not affect the Russian Federation's obligations under the ECT (as provisionally applied) on the international plane.”142
140. Professor Stephan cites both an official Opinion of the Duma’s Committee on Foreign Affairs from 2005 and a 2001 letter from President Putin. To quote from the former:
“Even though the non-submission to the State Duma of the draft law on ratification within the established period does not result in any legal consequences for the Russian Federation in the international arena, the State body's disregard of the provisions of the Federal Law is not acceptable.”143
141. Professor Stephan concludes:
“This confirms the obvious point that a provisionally applied treaty creates international obligations and therefore cannot be terminated unless a signatory state communicates to other signatory states its intent not to be bound.144 Indeed, the express terms of Article 23 provide that provisional application shall terminate either by the entry into force of the treaty in question or by notification to the other states of Russia's intention of
141 Russian Note on Provisional Application, p.2 (Exhibit C148); see also Zvekkov, V. P. and Osminin, B. I. (eds.), Commentary on the Federal Law on International Treaties of the Russian Federation (Spark Publishing: 1996), p. 74 (Exhibit CL48). ↩
143 Stephan Rep., ¶ 75 (emphasis added), quoting Opinion of the Committee on Foreign Affairs of the State Duma of the Russian Federation of June 16, 2005 No. 3.16 “On Draft Federal Law No. 146686-4 ‘On Ratification of the Agreement Between the Government of the Russian Federation and the Government of Canada On Cooperation on the Destruction of Chemical Weapons, the Dismantlement of Decommissioned Nuclear Submarines and the Physical Protection, Control and Accountancy of Nuclear and Radioactive Material” (Exhibit PBS17). ↩
144 Citing Official Response No. 2841p – P2 of the Government of the Russian Federation with respect to draft Federal Law “On Amending and Supplementing the Federal Law ‘On International Treaties of the Russian Federation’”, 10 May 2001 (“the decision concerning provisional application, including its term, is taken jointly by the parties to the treaty. Any unilateral measures in this respect are inadmissible”) (Exhibit PBS20). ↩
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termination. The six-month rule in Article 23(2) can have nothing to do with this.”145
142. In addition, the FLIT in general and Article 23(2) in particular refer to ratification of an “international treaty”, not an “international treaty provision”. It would be wholly unusual (and impractical) for a State’s domestic law to require domestic ratification of treaty provisions as distinct from treaties. Respondent’s argument must therefore apply equally to the whole ECT.
143. Yet Russia consistently complied with the ECT after six months from signature had passed. As the Hulley Enterprises Tribunal observed:
“The Russian Federation [...] nevertheless continued to apply it provisionally while omitting formally and officially to notify other signatories of its intentions not to ratify the Treaty until 20 August 2009. It appears that the Russian Federation remains—or remained—a Member of the Energy Charter Conference ‘in which ratification of the Energy Charter Treaty is still pending . . .’ and a national of the Russian Federation remains—or remained—Deputy Secretary-General of the Energy Charter Secretariat. The Russian Federation has participated in the meetings of the Energy Charter Conference, pursuant to Article 34 of the ECT, and in particular the quinquennial review of the Treaty provided for in sub-paragraph 7.”146
144. This practice indicates that Russia did not consider that Article 23(2) of the FLT had any effect on its provisional application of the ECT “after six months”. To the contrary, as noted previously, Respondent confirmed as late as 23 May 2007—on the website of the Ministry of Foreign Affairs—that “the Russian Federation applies [the ECT] on a provisional basis ...”.147
145. Finally, as noted, the FLIT came into effect after Russia signed the ECT and expressed its binding consent to apply the treaty provisionally. In these circumstances, to the extent the six-month rule on ratification (or any other provision)
146 Hulley Enterprises Jurisdiction Award, ¶ 390 (Exhibit CL9). ↩
147 Information Bulletin on the Energy Charter Treaty, official website of the Russian Federation Ministry of Foreign Affairs, 25 November 2005 (Exhibit C119). ↩
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of the FLIT may act to interfere with Respondent’s provisional application (and they do not for the reasons discussed), they may not be relied upon pursuant to the principle of pacta sunt servanda.148
146. As expressed by Russia’s Constitutional Court:
“[...] the Russian Federation may not evade in good faith performance of international treaties that have entered into force, to which it is a party. The basis for such legislative regulation is that the Russian Federation [...] should observe obligations it has voluntarily assumed for itself within international treaties, which is supported by the provisions of the Vienna Convention on the Law of Treaties [...]”149
147. From the point in time that the ECT was signed by Russia, it was within the power of the Russian state organs to not act inconsistently with their obligations, not make inconsistent laws and, insofar as any one of them considered that provisional application should be terminated, seek that the executive did so in accordance with the ECT and international law.
148. Thus, once Russia had agreed to provisional application of the ECT on 17 December 1994, it was not open to it to introduce “inconsistent” domestic law that would prevent such provisional application. To the extent Respondent did so, it would breach its obligation under Article 45(1) and its international responsibility would be engaged.150
148 Article 18, Vienna Convention (Exhibit RL49). ↩
149 Judgment No. 8-P, p. 6 (Exhibit R35). ↩
150 Article 3, International Law Commission’s Draft Articles on the Responsibility of States for Internationally Wrongful Acts (2001) and commentaries thereto, reproduced in Crawford, J. (ed.), The International Law Commission's Articles on State Responsibility: Introduction, Text and Commentaries (CUP: 2002), pp.86-90 (Exhibit CL33); see also Article 27, Vienna Convention (Exhibit RL49). ↩
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149. The starting point for determination of this Tribunal’s rationae materiae jurisdiction is Article 26 ECT, which provides for the resolution of disputes between a Contracting Party and an Investor of another Contracting Party relating to “an Investment of the latter in the Area of the former”. As discussed above, Respondent is a Contracting Party by operation of the provisional application provisions of Article 45 ECT. Respondent does not dispute that Claimant is an Investor of another Contracting Party. The objection made is that Claimant has no protected Investment.
150. Article 1(6) ECT defines Investment as follows:
“‘Investment’ means every kind of asset, owned or controlled directly or indirectly by an Investor and includes:
(a) tangible and intangible, and movable and immovable, property, and any property rights such as leases, mortgages, liens, and pledges;
(b) a company or business enterprise, or shares, stock, or other forms of equity participation in a company or business enterprise, and bonds and other debt of a company or business enterprise;
(c) claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment;
(d) Intellectual Property;
(e) Returns;
(f) any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector.”
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151. Thus, the “ordinary meaning”151 of the terms employed in Article 1(6) is that the definition of “Investment” is wide and open-ended: an investment is “every kind of asset”; the list of assets in sub-paragraphs (a)-(f) included within the term is non-exhaustive.
152. Once falling within the definition of Investment in Article 1(6) ECT, the only limiting requirement is that it “must be associated with an Economic Activity in the Energy Sector”, broadly defined in Article 1(5) to mean:
“an economic activity concerning the exploration, extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing, or sale of Energy Materials and Products except those included in Annex NI, or concerning the distribution of heat to multiple premises”.
153. For purposes of this case, therefore, the analysis of whether the Loans are “Investments” within the meaning of Article 1(6) ECT is straightforward. The Loans by definition and by law constitute the “debt of a company or business enterprise”, here, the debt of Yukos Oil. In addition, the Loans are an “asset” owned by Yukos Capital and the obligation of Yukos Oil to repay the Loans, together with interest thereon, constitute “Returns” as that term is defined in Article 1(9) ECT. Any one of these would satisfy the test for an Investment as that term is defined in the Treaty.
154. Moreover, the Loans were made to Yukos Oil, at the time one of the largest oil companies in Russia and one engaged exclusively in “Economic Activity in the Energy Sector”. The Loans therefore, again by definition, were “associated with” that activity.
155. Respondent has emphasized that it is not “passing judgment on the legality of the ‘Loans’”.152 Assuming the Loans were lawfully made, a fact Respondent does not and
151 Following Article 31(1), Vienna Convention (Exhibit RL49). ↩
152 Resp. Mem., ¶ 127. To the extent Respondent is suggesting otherwise, such an argument would be precluded at this stage of proceedings pursuant to the Tribunal’s Procedural Order No. 1 dated 24 April 2014. See also Anatolie Stati, Gabriel Stati, Ascom Group S.A. and Terra Raf Trans Traiding Ltd v. The Republic of Kazakhstan, SCC Case No. 116/2010, Award, 19 December 2013 (Böckstiegel, Haigh, ↩
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cannot challenge, they constitute the valid, legal indebtedness of Yukos Oil. The inquiry must stop here: the Loans are Investments under Article 1(6) ECT.
156. In seeking to avoid this conclusion, Respondent has contrived to come up with 27 pages of argument purporting to demonstrate that the Loans are not Investments. The arguments can be placed under three headings: (i) the Loans are not really loans but dividends; (ii) the Salini test should be applied to supplement the text of Article 1(6) ECT and thereby introduce additional requirements; and (iii) the Loans are not associated with an Economic Activity in the Energy Sector. These arguments are devoid of merit. We address each in turn below.
157. Before doing so, we pause to address two threshold issues of treaty interpretation raised by Respondent. First, Respondent asserts that the Article 1(6)(b) ECT category of Investment covering “bonds and other debt of a company or business enterprise” does not include loans because “‘other debt of a company or business enterprise’ is not set off by commas and is thus to be treated as within the same asset class as ‘bonds’”.153 Purporting to rely upon the ejusdem generis principle, Respondent suggests that “the general term ‘debt’ must belong to the same genus as the specific word ‘bond’ that precedes it” and, therefore, “‘other debt of a company’ . . . refers to debt instruments issued by a company . . . [and] covers equity and debt interests in a company, but not claims to money under a loan agreement”.154
158. “[B]onds and other debt” means exactly what it says—bonds and (i.e., in addition) other debt. Loans are “other debt of a company”, “debt instruments issued by a company” and “debt interests in a company”. What Respondent appears to be saying is that Article 1(6)(b) ECT covers only bonds. This tortured “interpretation” is quite literally nonsensical. No Latin maxim can permit such a departure from the plain text
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Lebedev) (“Stati”), ¶ 812 (under Article 1(6) ECT, “[a]t least with regard to jurisdiction, the Tribunal does not see where such a requirement [i.e., compliance with law] could come from”) (Exhibit CL3).
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of the Treaty and Claimant is aware of no investment treaty anywhere (whether ECT or otherwise) where “investment” definitions relating to debt obligations have been interpreted to exclude loans.
159. The second, related point, is that Respondent seeks to equate loans with “claims to money” and then subject loans to an “overall investment” test.155 While one element of a loan is a contractual claim to repayment, “claims to money”, as Electrabel v. Hungary makes clear, is not about loans but, generally speaking, purchase and sale transactions. Loans are covered by the specific category of “other debt” in Article 1(6)(b) ECT and are treated the same as equity investments; the “overall investment” test of Electrabel has no application.
160. Invoking the principle of effet utile, Respondent suggests that if loans were included in subparagraph (b) there would be no need to refer to “claims to money” in subparagraph (c).156 This is not a serious point.
161. The fundamental distinction between “claims to money” and “loans” is aptly described by Professor Zachary Douglas in The International Law of Investment Claims,157 relied upon by Respondent. In typical misleading fashion, Respondent quotes from Professor Douglas’s paragraph on claims to money while omitting what he has to say about the very different subject of loans. Thus, Respondent quotes the following:
“[i]f, in order to qualify for investment treaty protection, it were sufficient for the claimant to have secured a legal right to claim money, then one must
155 Resp. Mem., ¶¶ 146-48, quoting Electrabel S.A. v The Republic of Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, 30 November 2012 (Veeder, Kaufmann-Kohler, Stern) (“Electrabel”), ¶¶ 5.52-5.53 (Exhibit RL76). ↩
156 Resp. Mem., ¶¶ 143-44. In fact, while the argument is confusing, Respondent appears to be saying that loans are not “other debt” and cannot satisfy the “overall investment” test for “claims to money” because they are the investment, thus eliminating them from any protection under the ECT. See id. at ¶¶ 143-44, 146-48. ↩
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inevitably determine that a winning lottery ticket bought in the host state is an investment”.158
162. Lottery tickets are not involved in this case;159 substantial loans are. Professor Douglas has this to say about loans just a few paragraphs above the passage quoted by Respondent:
“Credit
The provision of credit by the investor to an entrepreneur or enterprise engaged in commercial activities in the host state qualifies as an investment. The investor acquires rights to a debt, which can be assigned and thus has the feature of a right in rem. Credit can take the form of a loan, be part of a sales transaction, or be provided by finance leasing.
[...]
A loan is the form of credit that features most prominently as an investment in the corpus of investment treaty precedents.”160
163. Respondent contends that the Loans were “in substance a dividend of profits . . . dressed up as a ‘loan’ in order to avoid Russian corporate profit and withholding taxes”.161 Having confirmed that it is not “passing judgment on the legality of the ‘Loans’”,162 this argument is not open to Respondent. The question of whether a transfer of funds constitutes a loan or a dividend is a legal one answered by well recognized tests that are virtually uniform the world over. In this case, Respondent does not contest that the Loans are anything other than legally made loans. Accordingly, they cannot, as a matter of law, be dividends or anything other than loans. Respondent’s argument on this point is specious.
158 Resp. Mem., ¶ 97, quoting Douglas, ¶ 387 (Exhibit RL64). ↩
159 Depending on the nature of a hypothetical lottery one could imagine scenarios where lottery tickets would attract treaty protection. ↩
160 Douglas, ¶¶ 381, 383 (Exhibit RL64). ↩
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164. For the avoidance of doubt, Claimant has submitted the FTI Report. Mr Gleichenhaus has substantial experience and expertise with evaluating creditor claims, including those in an inter-company context, to assess whether loans may properly be re-characterized as dividends. Having examined the Loans at issue in this case, he concludes as follows:
“The Yukos Loans have the commercial characteristics of valid and enforceable loans, and were approved by signatories of Yukos Capital and Yukos Oil and structured using arm’s-length terms. The Yukos Loans cannot be characterized as dividends, but are properly characterized as debt instruments. In particular, they are consistent with the substance, form and requirements of debt instruments, including with respect to: i) defined interest payments and a defined maturity date; ii) defined rights to enforce the payment of principal and interest; iii) a defined obligation to repay the loans; iv) the existence of formal and duly executed loan agreements; and v) the intention of Yukos Capital and Yukos Oil to establish a debtor-creditor relationship (and the subsequent actions of Yukos Capital and Yukos Oil affirm that intent).
The funding in the amount of principal due under the December 2003 and August 2004 Loans was transferred from the bank accounts of Yukos Capital to the bank accounts of Yukos Oil. Interest due under the December 2003 Loan was paid by Yukos Oil to Yukos Capital in accordance with the terms of the December 2003 Loan for the interest periods ended December 31, 2003, March 31, 2004 and June 30, 2004. Yukos Capital exercised its valid rights and remedies available under the December 2003 and August 2004 Loans including issuing a formal notice of acceleration of the Yukos Loans and pursuing a claim for the accelerated principal, accrued and unpaid interest and payment penalties in accordance with the terms of the Yukos Loans.
In sum, the fact that the Yukos Loans are intercompany loans does not negate the validity or enforceability of these loans. In this respect, Yukos Capital is entitled to the same creditor status as any other lender would have been, whether from inside or outside the Yukos group of companies.”163
165. Stated differently:
“Whether for administrative, tax or other reasons, when done according to applicable legal and regulatory requirements, intercompany loans are to be treated no differently than loans received from outside lenders. They establish
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a lender/borrower or creditor/debtor relationship in the same way. Properly made, intercompany loans can in no way be characterized as dividends.”164
166. Mr Gleichenhaus also explains that:
“the use of intercompany and intra-group loans is a very common and often-utilized strategy for cash management in multinational companies and their subsidiaries.”165
167. Mr Gleichenhaus thus notes that “[t]he use of intercompany debt is ubiquitous” and cites as examples Rosneft, Royal Dutch Shell, CononoPhillips and Exxon, among others, as companies that regularly rely upon intercompany loans for tax effective financing of their activities.166 In the words of the Saluka v. Czech Republic Tribunal, in making the Loans, Claimant was “simply act[ing] in a manner which is commonplace in the world of commerce”.167
168. This is not alien to Respondent. Rosneft is majority owned and controlled by the Russian Federation and featured prominently in the expropriation for which Claimant seeks redress. Igor Sechin, Rosneft’s President and Vice Chairman, is perhaps President Putin’s closest ‘partner in crime’. In addition to making regular use of intercompany loans, Rosneft has recognized Yukos Capital’s intercompany loans to Yuganskneftegaz (a former Yukos subsidiary ‘acquired’ by Rosneft as part of the wrongdoing alleged herein) as loans, not dividends or anything else, on its own balance sheet.168
169. Further, and as noted previously, Respondent was informed of the loans when Yukos Oil (i) submitted its financial statements to the Russian tax authorities and (ii) applied to those same authorities for exemptions from tax on interest payments made under
165 FTI Rep., ¶ 20 (emphasis added). ↩
167 Saluka Investments BV (The Netherlands) v. The Czech Republic, UNCITRAL, Partial Award, 17 March 2006 (Watts, Fortier, Behrens), ¶ 228 (Exhibit CL20). ↩
168 Rosneft Consolidated Financial Statements Years Ended 2003, 2004, 2005, pp.39, 41 (Exhibit C149). ↩
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the December 2003 Loan. In recognizing such exemptions, Respondent therefore recognized that the Loans were valid intercompany loans, not dividends, and further recognized Claimant as a Luxembourg domiciliary.
170. Respondent suggests that because the Loans were accounted for in the consolidated financial statements of Yukos Oil, “[t]hey are therefore not ‘debts of Yukos Oil’s’”.169 If that were a true statement it would turn upside down the accounting and public disclosures of virtually every multinational company in the world. Whether consolidated financial statements are compiled is a function of the degree of ownership interest a parent company has in its subsidiaries. It has nothing to do with, and cannot alter, the legal nature of transactions that may have been entered into between a parent and a subsidiary.
171. As Bruce Misamore, Yukos Oil’s former Chief Financial Officer, explains in his witness statement:
“For accounting purposes, therefore, the YUKOS Oil subsidiaries were controlled by YUKOS Oil and their results were consolidated with those of YUKOS Oil for reporting purposes. This is done by multinational companies all over the world. That does not change the nature of any transactions that may have been entered into between the YUKOS group companies or the rights or obligations they may have owed to one another. In the context of this case, the YUKOS Oil Loans remained loans and YUKOS Oil’s obligations to repay the Loans plus interest were not altered by the inclusion of Yukos Capital’s results in YUKOS Oil’s consolidated financial statements. I also note that Yukos Capital had its own board of directors and it observed required corporate formalities in connection with the YUKOS Oil Loans, as did its direct parent company Yukos International UK BV.”170
172. The same applies to the rehabilitation plan submitted by Yukos Oil’s management in an attempt to stave off the illegal bankruptcy proceedings orchestrated by Respondent.171 Yukos management undertook to use company law procedures to
170 Misamore Statement, ¶ 22; see also FTI Rep., ¶¶ 38-40. ↩
171 Yukos Oil Company’s Outline of Proposed Financial Rehabilitation Plan and Debt Payment Schedule and/or Offer of Voluntary Arrangement to Creditors, 1 June 2006 (Exhibit R50). ↩
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cause its subsidiaries not to pursue intercompany claims against Yukos if Respondent would cease its unlawful expropriation of the company. This was one in a series of (unsuccessful) settlement offers made to find some solution acceptable to Respondent short of Yukos’s total destruction. It is wholly intertwined with the merits of this case. For present purposes, suffice to say that the plan did not, as Respondent asserts, say that “loans to and from Yukos Capital cancelled each other out as an economic matter”.172
173. In sum, as noted by former PwC and Yukos tax advisor Steven Wilson in his written testimony for the second trial of Mikhail Khodorkovsky (omitted from the other Yukos testimony submitted to the Tribunal and relied upon by Respondent):
“[A] key treasury objective was to enable funds to be brought into Russia in the form of loans from Yukos Capital Sarl, the Luxembourg finance company established for this very purpose. Yukos Capital Sarl charged arm’s length interest on its loans to the Yukos production subsidiaries. I had been informed by treasury personnel that inter-company lending within the group was an important priority as funds accumulated outside Russia (from Russian trading profits distributed to the offshore structure, foreign trading profits accumulated offshore and treasury profits accumulated offshore) at low tax rates would be needed for investment in Russia.”173
174. Accordingly, the Loans are loans—not dividends—and they are unquestionably Investments.
175. While not relevant to the Tribunal’s analysis (see discussion below), that the Loans were made as part of a strategy to minimize group tax exposure and repatriate funds for investment in Russia makes no difference. These motives do not convert Loans into dividends. Moreover, “[r]einvesting profits is also an investment”174—one
173 Interview Record of Steve Wilson, 16 April 2010, ¶49 (Exhibit C125) (emphasis added); see also Misamore Statement, ¶¶ 8, 17. ↩
174 Stati, ¶ 809 (interpreting Article 1(6) ECT) (Exhibit CL3). ↩
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viewed by President Putin as a “very good sign”175—and “every citizen has the right to plan its financial affairs so as to minimize the impact of taxation, as long as those arrangements respect the applicable law.”176
176. Respondent pays lip service to Article 31(1) of the Vienna Convention—and then rejects it—in one paragraph of its Memorial as follows:
“Pursuant to Article 31(1) of the Vienna Convention of the Law of Treaties, Article 1(6) ECT must be interpreted in good faith in accordance with its ordinary meaning, in its context and in light of the ECT's object and purpose. Arbitral tribunals have further emphasized the need to interpret the term ‘Investment’ in accordance with the concept of investment under general international law.”177
177. According to Respondent’s concept of “general international law”, “[t]he term investment has an inherent meaning which entails a contribution of money or other assets, i.e., a commitment of resources, a certain duration, and an element of risk”.178
178. These submissions are wrong. No tribunal has emphasized “the need to interpret the term ‘Investment’ [i.e. Article 1(6) of the ECT]179 in accordance with the concept of
175 President Putin’s Speech at the Energy Conference, London, 26 June 2003, published by the Russian Ministry of Foreign Affairs (Exhibit C151); see also Extract from President Putin’s Answers to Questions from the Participants in the Business Meeting of the APEC Members, Shanghai, 19 October 2001, available at: http://eng.kremlin.ru/transcripts/8849 > accessed on 29 October 2014 (Exhibit C150). ↩
176 Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. The Government of Mongolia, UNCITRAL, Award on Jurisdiction and Liability, 28 April 2011 (Lalonde, Grigera Naón, Stern), ¶ 528 (Exhibit CL21). ↩
177 Resp. Mem., ¶ 88. As regards Respondent’s reference to “general international law”, there is no such category of legal rule or principle in international law. A rule or principle is either a customary rule of law or a right or obligation derived from treaty or, following Article 38(1)(c) of the Statute of the International Court of Justice, a “general principles of law recognized by civilized nations” (Exhibit CL52). ↩
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investment under general international law”. Indeed, every tribunal to have considered the question has concluded to the contrary.
179. The first is Plama v. Bulgaria.180 There, the tribunal found that the non-exclusive list of Investments in Article 1(6) ECT “encompasses virtually any right, property or interest in money or money’s worth”.181 The tribunal reasoned that:
“The definition of ‘Investment’ under Article 1(6) . . . is broad, extending to ‘any right conferred by law or contract’. That definition would be satisfied by a contractual or property right even if it were defeasible. Applying Judge Higgins’ approach to disputed facts, the Tribunal must accept, pro tem, the investment alleged by the Claimant; and on this ground alone, the Tribunal decides that Bulgaria’s submission fails”.182
180. No suggestion was made in Plama, itself an ICSID case, that the Salini test183 or any other test of “general international law” was relevant.
181. The second case is Petrobart v. Kyrgyz Republic,184 which involved claims that a contract for the sale of gas condensate—and the right to be paid under that contract—constituted an “Investment”. In assessing the interpretation of Article 1(6) ECT, the tribunal observed that “[i]t is obvious that, when there is a definition of a term in the
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179 Having used the capitalized term “Investment”, we assume Respondent is here referring to Article 1(6) ECT (Exhibit C1). This is as it should be, as it is Article 1(6) ECT and the definition of Investment set forth therein that is at issue, not the definition or interpretation of “investment” under any other investment treaty. ↩
180 Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005 (Salans, van den Berg, Veeder) (“Plama”) (Exhibit RL88). ↩
181 Plama, ¶ 125 (Exhibit RL88). ↩
182 Plama, ¶ 128 (Exhibit RL88). ↩
183 The Salini test was coined after the Salini Costruttori S.P.A. and Italstrade S.P.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, 23 July 2001 (Briner, Cremades, Fadlallah) (“Salini”) where the tribunal set out an objective test for the definition of investment referenced separately in Article 25 of the ICSID Convention as a jurisdictional requirement under the Convention comprising of: (i) a substantial contribution; (ii) assumption of risk; (iii) duration; (iv) contribution to the economic development of the host state; and (v) regularity of profit or return: see ¶¶ 50-58 (Exhibit CL19). ↩
184 Petrobart Limited v. The Kyrgyz Republic, SCC Case No. 126/2003, Award, 29 March 2005 (Danelius, Bring, Smets) (“Petrobart”) (Exhibit CL17). ↩
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treaty itself, that definition shall apply and the words used in the definition shall be interpreted in light of the principle set out in Article 31(1) of the Treaty on the Law of Treaties”.185 The tribunal found that Article 1(6) should be interpreted broadly, citing the categories of defined Investments covering “claims to money” and “any right conferred by law or contract” and, therefore, that Petrobart’s right to be paid for its gas condensate was an Investment under Article 1(6). Interestingly, the tribunal cited the treaty involved in Salini as another example where investment was defined broadly but made no mention of what have come to be known as the factors comprising the Salini test.
182. The tribunal in Kardassopoulos,186 the third ECT case, merely quoted Article 1(6) and concluded, without discussion, that an indirect ownership of shares constitutes an Investment. No suggestion was made that the Salini test, or some other test of “general international law” should apply, despite the fact that Kardassopoulos was also an ICSID case.
183. The fourth case is Amto v. Ukraine.187 There, the tribunal noted that “Investment” under Article 1(6) represents a “wide definition (‘every kind of asset’) illustrated by six types of rights” and it had no difficulty finding that the shares at issue “constitute a kind of asset owned by the Claimant within the definition of the first part of Article 1(6) ECT . . .”.188 There was again no suggestion that additional elements or requirements for an Investment should be added to the ECT’s text via some “general international law” test.
185 Petrobart, p. 69 (Exhibit CL17). ↩
186 Kardassopoulos, ¶¶ 121-24 (Exhibit CL11). ↩
187 Limited Liability Company Amto v. Ukraine, SCC Case No. 080/2005, Final Award, 26 March 2008 (Cremades, Runeland, Soderlund) (“Amto”) (Exhibit RL77). ↩
188 Amto (Exhibit RL77), ¶¶ 36, 39. The issue that concerned the Tribunal was whether the Investment was associated with an Economic Activity in the Energy Sector. We discuss this point in Section D infra. ↩
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184. Amto was followed by a case Respondent knows well: Veteran Petroleum v. Russia.189 Veteran Petroleum is the companion case to Hulley Enterprises and, like this case, concerned Respondent’s expropriation of Yukos Oil. Respondent made the very same argument it now makes to this Tribunal, i.e., that “under the rules of treaty interpretation, Article 1(6) of the Treaty itself needs to be interpreted in accordance with general international law”.190
185. The argument was flatly rejected by the Veteran Petroleum Tribunal:
“The Tribunal finds that the ECT, by its terms, applies to an ‘Investment’ owned nominally by a qualifying ‘Investor,’ and that nothing more is required. Respondent’s submission that simple legal ownership of shares does not qualify as an Investment under Article 1(6) of the ECT finds no support in the text of the Treaty. The breadth of the definition of Investment in the ECT is emphasized by many eminent legal scholars. As defined in Article 1(6) of the ECT, an ‘Investment’ includes ‘every kind of asset’ owned or controlled, directly or indirectly, and extends not only to share of a company but to its debt (Article 1(6)(b) of the ECT), to monetary claims and contractual performance as well as ‘any right conferred by law’ (Article 1(6)(f) of the ECT, emphasis added). The Tribunal recalls again that, according to Article 31 of the VCLT, a treaty is to be interpreted in good faith in accordance with the ordinary meaning of its terms. The Tribunal reads Article 1(6)(b) of the ECT as containing the widest possible definition of an interest in a company, including shares (as in the case at hand), with no indication whatsoever that the drafters of the Treaty intended to limit ownership to ‘beneficial’ ownership”.191
186. For the same reasons, the Veteran Petroleum Tribunal found that:
“[It] cannot accept Respondent’s argument that an ‘Investment,’ to qualify under the ECT, requires an injection of foreign capital. Indeed, as already explained above, the definition of investment in Article 1(6) of the ECT does not include any additional requirement with regard to the origin of capital or the necessity of an injection of foreign capital.[...] The Tribunal cannot in
189 Veteran Petroleum Limited (Cyprus v. The Russian Federation, PCA Case No. AA 228 (UNCITRAL Rules), Interim Award on Jurisdiction and Admissibility, 30 November 2009 (Fortier, Poncet, Schwebel) (“Veteran Petroleum”) (Exhibit CL26). ↩
190 Veteran Petroleum, ¶ 433 (Exhibit CL26). ↩
191 Veteran Petroleum, ¶ 477 (Exhibit CL26). ↩
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effect impose upon the parties a definition of ‘Investment’ other than that which the parties to the ECT, including Respondent, have agreed”.192
187. The Veteran Petroleum Tribunal thus concluded as follows: “Claimant is organized ‘in accordance with the law applicable’ in the Republic of Cyprus and owns shares of Yukos. Thus, Claimant owns an ‘Investment’ protected by the ECT and the Tribunal so finds. The Tribunal is not entitled, by the terms of the ECT, to find otherwise”.193 Replacing “Cyprus” with “Luxembourg” and “shares” with “debt” yields the correct (and only possible) result here—“Claimant owns an ‘Investment’ protected by the ECT”.
188. Next in the line of ECT jurisprudence is Electrabel. Electrabel involved claims under the ECT asserted in an ICSID proceeding. The tribunal recognized that Article 25 of the ICSID Convention and Article 1(6) ECT each has its own test for an investment. The tribunal did not conflate the two tests, or suggest that the Salini or any similar test had independent significance under the ECT, but correctly proceeded to analyse them separately. With respect to Article 25 of the ICSID Convention (not applicable here), and “[a]pplying the criteria of contribution, duration and risk”, the tribunal had “no hesitation in concluding that the Claimant made an investment within the meaning of Article 25 of the ICSID Convention”.194
189. The Electrabel Tribunal then turned to the separate analysis of Investment under Article 1(6) ECT, first noting that “Article 1(6) ECT, read with Understanding IV, comprises a broad definition of investment as ‘every kind of asset, owned or controlled directly or indirectly by an Investor . . . followed by an illustrative list of assets that fall with the definition of Investment’”. Consequently, “[i]n light of the extensive concept of ‘investment’ found in the first sub-paragraph of Article 1(6) ECT, the Tribunal decides that the [Claimant] owns an investment in Hungary”.195
192 Veteran Petroleum, ¶ 488 (emphasis added) (Exhibit CL26). ↩
193 Veteran Petroluem, ¶ 491 (Exhibit CL26). ↩
194 Electrabel, ¶¶ 5.43-5.45 (Exhibit RL76). ↩
195 Electrabel, ¶¶ 5.47-5.48 (Exhibit RL76). ↩
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190. The most recent in the line of relevant authorities (none, of course, discussed by Respondent and most not even mentioned), is Stati v. Kazakhstan.196 In that case, Kazakhstan made the same unsuccessful argument made by Russia in Veteran Petroleum—and relied upon the same, largely irrelevant, authorities cited by Respondent here.197
191. The argument met with the same fate:
“By this extremely broad definition [in Article 1(6) ECT], particularly as extended by its section (f) quoted above, it stands in contrast to the ICSID Convention which contains no definition of ‘investment’ and thus needs further interpretation as regularly done by ICSID tribunals. Guidelines and tests of criteria developed in this jurisprudence on the ICSID Convention and similar treaties, therefore, cannot be used as long as any right or activity is clearly covered by the wording of the above definition in ECT cases. Therefore, the so-called Salini test, controversial and much discussed both by the Parties in this case and otherwise in ICSID and similar arbitrations, even if applied as a flexible guideline rather than as a strict jurisdictional requirement, cannot be used for the definition of investment under the ECT or, likewise, in the present case. The Tribunal, thus, sees no need to examine the various criteria discussed for the Salini test”.198
192. Stati is on point not only legally but factually. Thus, the investments in that case included shareholder loans and repatriation of profits in circumstances where the Respondent alleged cash had been deliberately withdrawn as part of a strategy “aimed at removing capital from the companies”.199 The tribunal concluded as follows:
197 Stati, ¶¶ 773-778 (Exhibit CL3). ↩
198 Stati, ¶ 806 (emphasis added) (Exhibit CL3). The tribunal further observed that the Article 32 Vienna Convention requirements for recourse to supplementary means of interpretation “are clearly not fulfilled by the wide and highly detailed above definition of ‘investment’ in the ECT”, ¶ 807. See also The Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/03, Decision on Respondent’s Preliminary Objections on Jurisdiction and Admissibility, 18 April 2008 (Berman, Donovan, Lalonde) (“Rompetrol”), ¶85:“The Tribunal would in any case have great difficulty in an approach that was tantamount to setting aside the clear language agreed upon by the treaty Parties in favour of a wide-ranging policy discussion. Such an approach could not be reconciled with Article 31 of the Vienna Convention on the Law of Treaties...”) (Exhibit CL23). ↩
199 Stati, ¶ 687; see also ¶ 752 (Exhibit CL3). ↩
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“Claimants’ explanations as well as the evidence show that Claimants initially funded the operations of KPM and TNG through shareholder loans, which are investments under Art. 1(6) ECT, and that, later, substantial contributions to KPM and TNG were made through the reinvestment of profits. Reinvesting profits is also an investment, as Art. 14(1) ECT allowed Claimants to take the ‘Returns’ of KPM and TNG and to distribute them as dividends or to spend or invest them as they saw fit”.200
193. Thus above-summarized stands the relevant ECT jurisprudence on the interpretation of Investment as defined in Article 1(6) ECT. As noted, Respondent has simply elected to ignore all of this, a telling omission in and of itself. The ECT jurisprudence is consistent and clear: the text of Article 1(6) defines Investment; no other requirements, including those found in the so-called Salini test, may be applied to supplement its terms. On that basis, the Loans are unquestionably protected Investments.
194. The principal “authorities” relied upon by Respondent for supplementing the ECT’s terms are Romak v. Uzbekistan201 and Alps Finance v. Slovak Republic.202 Romak and Alps Finance involved claims under the Swiss-Uzbekistan BIT and Swiss-Czech/Slovak BIT, respectively. They are irrelevant to the issues for determination herein.
195. In addition, the Alps Finance Tribunal incorrectly applied the ICSID test as a “double check” even though the case was not brought under the ICSID Convention.203 Its holding that the Salini test is now accepted in “customary international law” was
200 Stati, ¶ 809 (emphasis added) (Exhibit CL3). ↩
201 Romak S.A. (Switzerland) v. The Republic of Uzbekistan, PCA Case No. AA280 (UNCITRAL Rules), Award, 26 November 2009 (Mantilla-Seranno, Rubins, Molfessis) (“Romak”) (Exhibit RL54). ↩
202 Alps Finance and Trade AG v. The Slovak Republic, UNCITRAL, Award, 5 March 2011 (Crivellaro, Stuber, Klein) (“Alps Finance”) (Exhibit RL55). ↩
203 Alps Finance, ¶ 240 (Exhibit RL55); see also Mytilineos Holdings SA v. The State Union of Serbia & Montenegro and Republic of Serbia, UNCITRAL, Partial Award on Jurisdiction, 8 September 2006 (Reinisch, Koussoulis, Mitrović), ¶ 117 (inappropriate to apply ICSID interpretations) (Exhibit CL16). ↩
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unnecessary to its finding204 and was supported, not by reference to state practice and opinio juris, but by reference to only two articles from the extensive and contested literature on the topic, and only one non-ICSID investment treaty award, Romak.205 For its part, the Romak Tribunal’s analysis may be explained in part by the fact that the investment in question was a mere sale of wheat and it utilized the BIT option for either UNCITRAL or ICSID arbitration to fashion an unprincipled (but perhaps correct as to result) argument for denying jurisdiction. Regardless, neither can or does offer any lessons relevant to this case.206
196. Respondent purports to find support for its “general international law” interpretation in the following language from Article 10(1) ECT:
“Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area.”207
204 As acknowledged by the tribunal itself at ¶ 240. It held that an assignment of receivables fell outside the asset-based definition in the BIT interpreted by its reference to the object and purpose because it did not contribute to the economies of the contracting parties: see ¶¶ 230-238. ↩
205 The Alps Finance Tribunal (at ¶242) (Exhibit RL55) also expressly relied on and cited as an illustrative example, the 2007 Award in Malaysian Historical Salvors v. The Government of Malaysia, ICSID Case No. ARB/05/10 Award on Jurisdiction, 17 May 2007 (Hwang) which was in fact annulled on the basis that it applied the Salini criteria (Decision on the Application for Annulment, 16 April 2009; Schwebel, Shahabuddeen, Tomka) (Exhibit CL14). ↩
206 See Guaracachi America, Inc. and Rurelec PLC v. The Plurinational State of Bolivia, PCA Case No. 2011-17, UNCITRAL, Award, 31 January 2014 (Júdice, Conthe, Vinuesa), (“Guaracachi”) ¶364 (Alps Finance and Romak are “fact-specific” cases) (Exhibit RL80). Respondent also relies upon Caratube International Oil Company LLP v. Republic of Kazakhstan, ICSID Case No. ARB/08/12, Award, 5 June 2012 (Böckstiegel, Griffith, Hossain) (“Caratube”) (Exhibit RL59) and Quiborax S.A., Non Metallic Minerals S.A. and Allan Fosk Kaplún v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Decision on Jurisdiction, 27 September 2012 (Kaufmann-Kohler, Lalonde, Stern) (“Quiborax”) (Exhibit RL57). The BITs at issue in those cases included an independent reference to “investment” in the definition of ‘investment’: In the US-Kazakhstan BIT it is provided that, “investment means every kind of investment” (Article 1(a) of the Treaty Between The United States of America and The Republic of Kazakhstan Concerning the Reciprocal Encouragement and Protection of Investment, 19 May 1992) (Exhibit CL54); and in the Chile-Bolivia BIT, “investment means any kind of assets or rights related to an investment” (Article 1(2) of the Treaty Between The Republic of Bolivia and The Republic of Chile Concerning the Reciprocal Encouragement and Protection of Investments, 22 September 1994) (Exhibit CL53). They are, therefore, of no assistance in interpreting Article 1(6) ECT (Exhibit C1). ↩
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197. Apparently, the argument is that certain categories of Investment found in the non-exhaustive Article 1(6) ECT list are not typically “made”. To the extent Article 10(1) can be said to support an additional requirement that Investments must be “made”, and Claimant considers this to stretch imagination beyond the breaking point, it has no significance here: loans are most definitely “made”.208
198. Respondent also suggests that because the “association with” language in Article 1(6) ECT has a solitary lower case “i” “investment” in it, “[c]ommentators have thus concluded [that] . . . the Contracting Parties to the ECT ascribed an objective meaning to the term ‘investment’...”.209 In fact, just the one commentator is cited. The argument is a slender one indeed and one that has not been adopted by any tribunal to have interpreted the meaning of Investment under the ECT.
199. Finally, Respondent argues that Article 1(6) ECT cannot be intended to extend protection to “any asset” because the Treaty’s object and purpose includes: (i) establishing “a legal framework in order to promote long-term cooperation in the energy field, based on complementarities and mutual benefits”; (ii) creating a climate favourable to “the flow of investment and technologies” and the promotion of the “international flow of investments”; and (iii) “catalys[ing] economic growth by means of measures to liberalize investment and trade in energy”.210
200. Respondent suggests that:
“No mutual benefits would be provided and no complementarities could be realized if any asset held by any company incorporated in one ECT Contracting State benefitted from ECT investment protection regardless of whether it engaged in any investment activity in another ECT Contracting
208 Claimant considers it likely that the Article 10(1) reference is intended to be to the Article 1(8) defined term “Make Investments”, defined as “establishing new Investments, acquiring all or part of existing Investments or moving into different fields of Investment activity” (Exhibit C1). ↩
209 Resp. Mem., ¶ 93, quoting Crina Baltag, The Energy Charter Treaty: The Notion of Investor (2012), p. 174 (Exhibit RL62). ↩
210 Resp. Mem., ¶ 95, quoting, respectively: Article 2 ECT; the Concluding Document of the Hague Conference on the Energy Charter Treaty, Title I (Objectives) and Title II (Implementation); and the Preamble to the ECT (Exhibit C1). ↩
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State, had control or direction over the asset, or transferred any value to another ECT Contracting State. Nor could the protection of such assets catalyze economic growth or promote the international flow of investments”.211
201. Reciprocal protection, by definition, provides “mutual benefits” and “complementarities” whether that protection extends to “any asset” or some subset thereof. Further, an understanding of signatory states and their investors that “any assets” will receive treaty protection—provided the express requirements of Article 1(6) of the ECT are met—will of course promote investment and growth as investors may engage in economic activity in the energy sector secure in the knowledge that no eventual investment treaty tribunal may deprive them of that protection. If that were not the case, speculation on whether the Salini test or some other test of unknown origin or content may apply could only act to chill investment activity. Certainly, there is nothing about extending Treaty protection to “any asset” that will impede or run counter to the ECT’s object and purpose.212 On that basis alone, it must be said that signatory states intended to extend protection to those Investments defined by the express terms of Article 1(6) ECT. Nothing in the Treaty suggests otherwise.
202. While not necessary—and reiterating that the Tribunal should not consider the point—the Loans would satisfy the Salini test in any event.
203. As a threshold matter, even in ICSID cases:
“Whether the so-called Salini test relied upon by the Respondent has any relevance in the interpretation of the concept of ‘investment’ under Article 25(1) of the ICSID Convention is very doubtful. The test finds its source in a decision on jurisdiction issued by an ICSID tribunal in the case Salini v. Morocco. Assuming arbitral decisions and awards are ‘judicial decisions’ within the meaning of Article 38(d) of the Statute of the ICJ, which is far from
212 Which also underscores a “determin[ation] to create a climate favourable to the operation of enterprises and to the flow of investments and technologies by implementing market principles in the field of energy” (Concluding Document of the Hague Conference on the European Energy Charter, Title I (Objectives), ¶ 2) (Exhibit C-1 p.214). ↩
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being commonly accepted, this would be on condition that they have attained a sufficient degree of publicity and are part of a ‘jurisprudence constante’. As shown hereafter, there is no such a ‘jurisprudence constante’ with respect to acceptance of the Salini test.”213
204. Thus, while the Salini test focuses on duration, contribution and risk, other tribunals, including the Romak Tribunal relied upon by Respondent, have looked to whether there was a “commitment of funds or other assets with the purpose to receive a profit, or ‘return’, from that commitment of capital” and have found the test satisfied where there is “[a]ny dedication of resources that has economic value”.214
205. It cannot be disputed that Yukos Capital committed funds, indeed, approximately US$ 3.2 billion, to Yukos Oil with the purpose to receive repayment plus interest and profit from the interest rate spread between the Loans and Yukos Capital’s own cost of funds.215
206. Respondent asserts that Claimant made no commitment or contribution because the Loan proceeds were not “its own funds”.216 This is both irrelevant and wrong. First, the source of funds for an investment is not relevant even in non-ECT cases; as discussed above, it is manifestly irrelevant under Article 1(6) ECT. As concisely put by the tribunal in ADC v. Hungary, “considerations of whence comes the company’s capital and whose nationals . . . control it are irrelevant”.217
213 Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7 (formerly FTR Holding SA, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay), Decision on Jurisdiction, 2 July 2013 (Bernardini, Born, Crawford), ¶¶ 204, 205 (Exhibit CL18). ↩
214 Romak, ¶¶ 177, 214 (Exhibit RL54); see also, for example, Tokios Tokieles v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction, 29 April 2004 (Weil, Bernardini, Price), ¶ 75 (Exhibit CL24). ↩
215 Misamore Statement, ¶¶ 24, 37; FTI Rep., ¶¶ 31, 35-37, 52. ↩
217 ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of Hungary ICSID Case No. ARB/03/16, Award, 2 October 2006 (Kaplan, Brower, van den Berg), ¶ 357 (Exhibit CL1); see also: CME Czech Republic B.V. v. Czech Republic, UNCITRAL, Partial Award, 13 September 2001 (Kuehn, Schwebel, Handl), ¶ 418: “The Treaty does not require that the assets or funds be imported from abroad or specifically from the Netherlands or have been contributed by the investor itself” (Exhibit CL5); Rompetrol, ¶110 (Exhibit CL23). Similarly, there is no “control” element as ↩
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207. Second, as explained by Mr Gleichenhaus:
“The Respondent asserts that the funds committed by Yukos Capital under the December 2003 Loan were not ‘its own funds’. To my mind this is not correct. It is commonplace for banks and other financing businesses to borrow funds in order to lend them, as Yukos Capital did here. That does not mean that the funds committed are not the funds of the lender; they quite clearly are. A core tenet of any finance company, including Yukos Capital as a wholly-owned finance subsidiary of Yukos Oil, is that it has funding from one or more sources and on-lends to or invests funds in other parties (different than the sources of funds). Frequently such a finance company is described as a financial intermediary as it is intermediating between two parties by its activities. The money raised from the sources of funding is clearly the finance company's funds. The finance company then lends or invests those funds. This description of a finance company includes virtually every category of entities in the world of finance such as commercial banks, investment banks, finance companies (whether wholly-owned, captive or independent), thrifts, hedge funds, private equity funds, etc. The money raised by a finance company would be presented on the right-hand side of its balance sheet as liabilities or obligations the finance company has as a borrower, whether represented by commercial paper, short-term or long-term borrowings or deposits. Meanwhile, the left-hand side of the balance sheet would reflect the loans or investments made by the finance company. It is clear that the funds of Yukos Capital are Yukos Capital's funds. Again, this is not relevant to an assessment of the legal relationship created between Yukos Capital and Yukos Oil or the nature of that indebtedness.”218
208. Respondent’s reliance on cases where the claimant entities in question were merely holding shares having made either nominal or no payments to acquire them is unavailing and beside the point. In Quiborax v. Bolivia, the claimant entity received one share for no consideration in order to comply with local Bolivian formalities219 and in Caratube v. Kazakhstan, the claimant paid only a nominal amount for a 92% shareholding in an international oil company (with insufficient evidence to establish even the payment of that amount).220 Likewise, KT Asia v. Kazakhstan221 involved an
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regards Claimant’s funds; this requirement is introduced by Respondent itself (Resp. Mem., ¶ 125) and finds no support in Article 1(6) ECT, published arbitral awards or even discussion in the literature.
218 FTI Rep., ¶ 35 (emphasis added). ↩
220 Caratube, ¶ 415 (Exhibit RL59). ↩
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agreement for the sale and purchase of shares in a Kazakh bank at their fractional value for which nothing was ultimately paid.
209. As a related point, Respondent asserts that “the ‘Loans’ did not transfer any value from Luxembourg or any other ECT Contracting State to the Russian Federation”.222 To the contrary, the Loans, by their terms and upon their performance, advanced approximately US$ 3.2 billion to Yukos Oil and, therefore, into Respondent’s economy.
210. Finally, Respondent asserts that Claimant “did not incur any risk with respect to the ‘Loans’”.223 This too is incorrect.
211. The principal authority relied upon by Respondent, KT Asia, underscores that when a contribution is made with a view to generating profits, that “necessarily implies a risk”.224 This test is met by the Loans, where Claimant extended significant financing to Yukos Oil with a view to profiting from the interest rate spread vis-à-vis its source of funds.
212. Moreover, as Mr Gleichenhaus explains,
“‘Risk’ to a lender, as Yukos Capital was a lender to Yukos Oil, reflects the possibility that the borrower may not pay the agreed-upon interest and principal payments on the agreed-upon time schedule. ‘Credit’ represents a lender’s belief that a borrower will repay a loan or the trust that a lender has in a borrower’s ability to repay a loan, or a loan itself. Should a borrower not make even a single payment as scheduled, it would be considered to be ‘in default’, meaning it has not upheld its legal obligation under the loan
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221 KT Asia Investment Group B.V. v. Republic of Kazakhstan, ICSID Case No. ARB/09/8, Award, 17 October 2013 (Kaufmann-Kohler, Glick, Thomas) (“KT Asia”) (Exhibit RL56). ↩
224 KT Asia, ¶ 170 (Exhibit RL56); see also Ceskoslovenska Obchodni Banka, A.S. v. The Slovak Republic, ICSID Case No. ARB/97/4, Decision of the Tribunal on the Objections to Jurisdiction, 24 May 1999 (Buergenthal, Bernardini, Bucher), ¶90:“an element of risk is implicit in most economic activity.” (Exhibit CL4). ↩
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agreement. The risk for Yukos Capital was that Yukos Oil may default, and in fact did. The Yukos Oil Loan was an asset on the left-hand side of Yukos Capital’s balance sheet. No analysis of the risk of Yukos Oil’s default or potential default on that loan would take into account how Yukos Capital financed itself, directly or indirectly, as shown on the right hand side of its balance sheet.’”225
213. What Respondent is really complaining about is not that Yukos Capital had no risk, but rather that it hedged or insured against a significant part of that risk. Mr Gleichenhaus observes that “hedging, that is reducing, moderating or eliminating, the risk of loss are prudent balance sheet management strategies for a lender,” and lists various examples of risk management employed by lenders.226 In no way should an effective risk management strategy be said to deprive an investment of treaty protection and Claimant is aware of no authority to support that proposition. Indeed, if that were the case, no insured against loss would be capable of recovery from any third party that had caused the loss.
214. Mr Gleichenhaus confirms that the source of the funds loaned to Yukos Oil is irrelevant in any analysis of the risk that Yukos Oil may default. That risk was a real risk (which ultimately materialized) irrespective of how such risk was hedged or insured. By way of analogy, the ability to insure against the risk of a car accident does not in any way alter the risk that an accident may occur. An insured or hedged risk is nevertheless a risk, and the insurance or hedge has no bearing on the likelihood of such risk in fact occurring – it merely impacts the financial consequences of such occurrence.
215. Further, for Yukos Capital there was more at stake in the event of a default on the Loans as a result of wrongful interference by Russia. If it materialized, such risk jeopardized Yukos Capital’s entire business purpose as an intra-group financing company. And when it materialized, it had precisely this effect. The magnitude of Yukos Oil’s default as a result of Russia’s unlawful hostile actions (and Russia’s
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steadfast denial of any recovery) signified an abrupt end to Yukos Capital’s ability to advance any loans in the future.
216. Respondent seems to suggest that any risk requirement would be satisfied only if Claimant “could be bankrupted as a result of the non performance of its borrowers”.227 This cannot possibly be the test, even were this is an ICSID case. Nonetheless, the result of Respondent’s unlawful acts, which rendered performance by Claimant’s borrower Yukos Oil impossible (i.e., expropriated Claimant’s borrower and with it Claimant’s Investment) has effectively put Claimant out of business.228
217. Respondent’s final salvo on Investment is to claim that the Loans are not associated with Economic Activity in the Energy Sector as required by Article 1(6) ECT. This claim too is without merit.
218. Respondent’s argument is that “associated with” requires “a functional relationship between the investment and the ‘Economic Activity in the Energy Sector”’229 and that no such “functional relationship” exists here because “the sole purpose of the ‘Loans’ was to avoid Russian taxes and neither of the ‘Loans’ allegedly made by Claimant to Yukos Oil Company was used to engage in any of the economic activities set forth in the above Understanding on Article 1(5) ECT”.230
227 Resp. Mem., ¶134, quoting Minutes of Yukos International U.K. B.V.’s Board of Directors, 18 September 2007 (Exhibit R51). ↩
228 Claimant’s other principal borrowers, former Yukos Oil production subsidiaries Yuganskneftegaz, Tomsneft and Samaraneftegaz, defaulted on their obligations after they were “acquired” by Rosneft as part of the Respondent’s expropriation of Yukos. Claimant has been pursuing enforcement actions with respect to those loans in a number of jurisdictions. ↩
229 Relying on Amto (Exhibit RL77). ↩
230 Resp. Mem., ¶¶ 152-159. The Understanding on Article 1(5) ECT sets forth an “illustrative” list of the kinds of activities engaged in by energy companies (Exhibit C1). ↩
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219. As noted above, the purpose of the Loans was to advance billions of dollars to a major oil company whose only activities were in the energy sector. It is, therefore, absurd to suggest that the Loans were not “associated with” that activity. That they were also designed to minimize tax exposure and repatriate funds is, as discussed, of no moment.
220. Amto v. Ukraine is not, as Respondent suggests, “directly on point”.231 In Amto, the Claimant did not invest in an energy company. Instead, it made an equity investment in a company (i.e., EYUM-10) that provided certain contractual services to, among others, energy companies. The tribunal therefore examined the services provided by EYUM-10 to see if those services were “associated with economic activity in the energy sector”. It did this because EYUM’s operations did not “constitute in themselves an ‘Economic Activity in the Energy Sector”’ and a mere contractual relationship between EYUM-10 and an energy company, without more, would not necessarily be enough. Having examined the contracts between EYUM-10 and the energy company in question, the tribunal concluded that the relationship was sufficiently close to be “associated with” energy activities.232
221. Further, the Amto Tribunal did not suggest that “functional relationship” was the test, using that phrase only in the context of its attempt to provide an illustrative indication of what might fall outside the scope of the last paragraph of Article 1(6).233 Nor did it interpret the provision to mean that, as asserted by Respondent, “[a] contractual relationship with an energy producer is... insufficient to qualify as an investment”.234 Rather, the key passages from the tribunal’s reasoning are these: “...the interpretation of the words ‘associated with' involves a question of degree, and refers primarily to the factual... association.... The open-textured phrase ‘associated with'
232 Amto, ¶¶ 39-43 (Exhibit RL77). ↩
233 Even then, the tribunal did not provide an example of what such a “mere contractual relationship” would be, and so its relevance is limited. ↩
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must be interpreted in accordance with the object and purpose of the ECT, as expressed in Article 2.’”235
222. Thus each case must turn on its own facts, as applied to the actual wording of Article 1(6) interpreted in light of the ECT’s object and purpose. The significance of the Amto Tribunal’s award lies only in the example its finding on the facts provides.236
223. The situation in Amto has nothing to do with the situation here. Claimant invested directly in an energy company, indeed a company that engaged only in energy activities. Unlike EYUM-10 in Amto, Yukos Oil’s operations did “constitute in themselves an ‘Economic Activity in the Energy Sector”’. That is the end of the inquiry. Indeed, Claimant is aware of no authority, and Respondent cites none, where a tribunal has examined the use of proceeds of equity or debt financing provided directly to an energy company to determine whether that financing was “associated with” activity in the energy sector. Certainly, none of the prominent tribunals to have considered claims under the ECT has done so, nor even have the respondents in those cases suggested they should.
224. The reason is clear: the notion that such an exercise should be performed is absurd and untenable. On Respondent’s interpretation, treaty protection would attach under the ECT only if claimants could prove that equity or debt financing was used for one of the activities listed in the Understanding on Article 1(5). Thus, the logic of Respondent’s argument is that investments of funds in a company carrying out activities in the Energy Sector, in whatever form of asset the funding takes (loans, bonds, shareholder contributions, etc), would only attract protection under the ECT if the funds are used by that company specifically for the physical or actual exploration, production, transportation, marketing or sale of oil, and not the related necessary ancillary tasks of running a company dedicated to those activities which are not,
235 Amto, ¶ 42 (emphasis added) (Exhibit RL77). ↩
236 The contract in question – the provision of technical services to a power plant – was found to be an activity within the last paragraph of Article 1(6) such that shares in the company which held the contract were “associated with” that activity. ↩
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strictly speaking, e.g. “exploring for oil”, e.g. running the office, administering staff and pay roll, employing lawyers and paying taxes and shareholders, and so forth.
225. This is unworkable and, moreover, produces absurd results. First, it is almost impossible to sensibly draw the line between those tasks that go to the exploration, production, transportation, marketing or sale of oil and those that do not: if financing the wages of the employees who drill the well falls into that category, what about the salary of the finance clerk who manages the wages of the employee who drills the well but also calculates shareholder dividends? Second, whether the investment would be protected by the ECT would be subject to the whims of the company and whether it complied with any obligation to allocate the funds to a specific activity. Third, it may not be possible to trace how the funds in question have been spent.237 Fourth, as applied to equity investments, the test posited by Respondent logically would provide Treaty protection limited to those aspects of the company’s operations relating to the actual exploration, production, transportation, marketing or sale of oil—or might even be said to exclude protection for equity investments altogether where no cash reaches the company (i.e., purchases on an exchange).
226. It follows that the requirements of an “association with” Economic Activities in the Energy Sector must be satisfied in the context of investments made by way of funds where they are provided directly to a company engaged in such activities. In any event, the Understanding on Article 1(5) is only an “illustrative” list of activities; raising funds is a critically important activity of virtually all energy companies. There is no question that direct equity and debt investments in energy companies are associated with their activities and attract the protection of the Treaty.
227. While irrelevant, Respondent’s factual assertions are also wide of the mark. Respondent claims that the funds advanced pursuant to the December 2003 Loan were
237 For e.g. in Rompetrol, Romania also argued that the funds extended by the investor were used to pay off equity to previous shareholders rather than being invested in Romania. But the tribunal did not attest any significance to these arguments and rejected to inquire the actual motive of the claimant, ¶¶ 52, 115 (Exhibit CL23). ↩
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“used to pay a massive dividend” while those advanced pursuant to the August 2004 Loan were “allegedly used to pay a small portion of Yukos Oil Company’s back taxes”.238
228. In fact, at most only RUR 26 billion of the RUR 79.3 billion December 2003 Loan could have been used for the dividend payment—assuming a short term/snap shot view of treasury operations—and Respondent omits to mention that the dividend payment itself was necessary to complete the planned merger of Yukos Oil and Sibneft (i.e., the parties had agreed that Yukos would increase its leverage to be in line with that of Sibneft)239. The remaining proceeds of the December 2003 Loan (i.e., the majority) were used to fund Yukos Oil’s continuing operations.240 All of this is associated with activity in the energy sector. So too is the payment of taxes, the intended purpose of the August 2004 Loan; Respondent does not suggest otherwise.
229. Respondent’s final objection to jurisdiction is based on Article 17(1) of the ECT, pursuant to which a host state is entitled to deny the advantages of Part III of the ECT (“Part III”),241 if it can show that: (i) Claimant has no “substantial business activities” in the state where it is organized; and (ii) Claimant is controlled by citizens of a third state.
230. Claimant rejects Respondent’s jurisdiction challenge under Article 17(1) on three alternative grounds, namely that:
239 Misamore Statement, ¶¶ 30-31. ↩
240 Misamore Statement, ¶¶ 34-36. ↩
241 Part III of the ECT includes the investment protection and promotion provisions at Articles10 to 17 (Exhibit C1). ↩
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231. As mentioned above, Article 31(1) of the Vienna Convention242 provides that treaties should be interpreted “in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.”
232. Article 17(1) of the ECT provides that:
“Each Contracting Party reserves the right to deny the advantages of this Part to:(1) a legal entity if citizens or nationals of a third state own or control such entity and if that entity has no substantial business activities in the Area of the Contracting Party in which it is organized [...]”243
233. The above wording leaves no doubt that the reservation of the right to deny benefits pursuant to Article 17(1) applies only to “this Part” of the ECT, i.e., only to Part III. Other benefits of the ECT not found in Part III (such as the right to arbitrate in Article 26, Part V) are unaffected by Article 17(1). Any alleged entitlement to deny benefits
242 Vienna Convention (Exhibit RL49). ↩
243 ECT (emphasis added) (Exhibit C1). ↩
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under Article 17(1) cannot accordingly form the basis of a jurisdictional challenge. As the Plama tribunal confirmed:
“[...] the denial applies only to advantages under Part III. It would therefore require a gross manipulation of the language to make it refer to Article 26 in Part V of the ECT. [...]Article 26 provides a procedural remedy for a covered investor’s claims; and it is not physically or juridically part of the ECT’s substantive advantages enjoyed by that investor under Part III. [...] This limited exclusion from Part III for a covered investor, dependent on certain specific criteria, requires a procedure to resolve a dispute as to whether that exclusion applies in any particular case; and the object and purpose of the ECT, in the Tribunal’s view, clearly requires Article 26 to be unaffected by the operation of Article 17(1). As already noted above, for a covered investor, Article 26 is a very important feature of the ECT.”244
234. This passage also highlights that ascribing an ordinary meaning to Article 17(1) accords with the object and purpose of the ECT with respect to the dispute resolution provisions at Article 26. The Plama Tribunal was concerned that an overly wide construction of Article 17(1) could deprive a tribunal of jurisdiction based on the judgment of the host state as to whether or not the claimant had fulfilled the two substantive requirements of Article 17(1). The tribunal considered that, in effect, such an overly wide construction would mean that:
“[...] the Contracting State invoking the application of Article 17(1) is the judge in its own cause. That is a license for injustice; and it treats a covered investor as if it were not covered under the ECT at all”,and that:
“[i]n the absence of Article 26 as a remedy available to the covered investor (as the Respondent contends), how are such disputes to be determined between the host state and the covered investor, given that such determination is crucial to both?.”245
235. Thus, on both the plain wording of the clause and a purposive approach to the construction of Article 17(1), only the benefits of Part III can be denied under Article
244 Plama, ¶¶ 147-148 (Exhibit RL88). ↩
245 Plama, ¶149 (Exhibit RL88). ↩
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17, not the entire Treaty. As a result, the dispute resolution procedure provided in Article 26, Part V is unaffected by any operation of Article 17(1). As the Plama Tribunal held:
“In the Tribunal’s view, the contrary approach would clearly not accord with the ECT’s object and purpose. Unlike most modern investment treaties, Article 17(1) does not operate as a denial of all benefits to a covered investor under the treaty but is expressly limited to a denial of the advantages of Part III of the ECT. A Contracting State can only deny these advantages if Article 17(1)’s specific criteria are satisfied; and it cannot validly exercise its right of denial otherwise.”246
236. The Hulley Enterprises Tribunal applied similar reasoning in relation to Article 17(1):
“[...] Article 17 specifies—as does the title of that Article—that it concerns denial of the advantages of ‘this Part,' i.e., Part III of the ECT. Provision for dispute settlement under the ECT is not found in ‘this Part' but in Part V of the Treaty. Whether or not Claimant is entitled to the advantages of Part III is a question not of jurisdiction but of the merits. Since Article 17 relates not to the ECT as a whole, or to Part V, but exclusively to Part III, its interpretation for that reason cannot determine whether the Tribunal has jurisdiction to entertain the claims of Claimant.”247
237. This approach is further confirmed by the most recent ECT tribunal in Stati:
“Respondent’s argument that Ascom falls within the denial of benefits provision in Art. 17 ECT is not relevant in the present context. Article 17 ECT, as clearly indicated by its introductory words ‘of this part', only applies to Part III of the ECT, leaving unaffected the dispute resolution provision in Part V with Art. 26 ECT (see tribunal in Plama v. Bulgaria). And further, Art. 17 ECT would only apply if a state invoked that provision to deny benefits to an investor before a dispute arose and Respondent did not exercise this right.”248
247 Hulley Enterprises Jurisdiction Award, ¶ 440 (Exhibit CL9). ↩
248 Stati, ¶ 745 (Exhibit CL3). ↩
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238. Even the Empresa v. Ecuador decision (cited by Respondent)249 supports the contention that an evaluation of the substantive requirements of a denial of benefits clause is a matter for the merits, not jurisdiction.250 None of the other non-ECT awards relied on by Respondent contest this either.
239. In conclusion, the plain wording of Article 17(1), the purpose and object of the ECT, and consistent ECT jurisprudence preclude any challenge to jurisdiction on the basis of Article 17(1), and Respondent’s argument in this regard should be dismissed on this threshold basis alone.
240. Article 17(1) does not operate automatically. To be effective, the reserved right to deny the benefits of Part III must be exercised, and it has no effect until it is exercised. When exercised, the denial of benefits has no retrospective effect.
241. The plain language of Article 17 indicates that the host State is required to positively exercise its denial of benefits right for such right to be effective. Article 17(1) states: “Each Contracting State reserves the right to deny the advantages of this Part...”251 The denial of benefits right is accordingly merely a reserved right; benefits are not denied (regardless of the position of the investor) until such right is exercised.252 Investors that fall within the substantive requirements under Article 17(1) are accordingly not excluded from the protections contained in Part III, unless and until the reserved right has in fact been exercised by the host state.
249 Empresa Eléctrica del Ecuador, Inc. v. Republic of Ecuador, ICSID Case No. ARB/05/9, Award, 2 June 2009 (Sepulveda, Rooney, Reisman) (“Empresa”) (Exhibit RL85); see Resp. Mem., ¶ 167, fn 180. ↩
250 Empresa, ¶ 71 (Exhibit RL85). ↩
252 Petrobart, pp.58-59 (Exhibit CL17). ↩
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242. The wording of the ECT could have simply excluded from protection all investors that fall within both of the Article 17(1) criteria.253 However, in contrast to this, the signatories to the ECT chose to reserve to host states an exercisable right to deny benefits at some point in the future. Article 17(1) therefore requires host states to actively exercise this right. Even Respondent’s argument that it “may deny Claimant the benefits of Part III ECT at any time”254 implicitly concedes that Respondent must positively exercise the reserved right, and that any denial of rights is conditional upon such exercise.
243. This construction is also implicit from the context of Article 17(2)255, which provides a treaty basis for withdrawing treaty entitlements from nationals of third States where sanctions or other restrictive or diplomatic measures are imposed against that third State. Article 17(2) presupposes two things: first, ECT Part III advantages are extended to investors of “third states”, and second, they are so extended until such time as they are actively “denied”, i.e. withdrawn.
244. Four separate ECT arbitral tribunals have directly addressed whether the reserved right pursuant to Article 17(1) has to be positively exercised in order to effect a denial of benefits, and all four tribunals have concluded that it has to be exercised: Plama v. Bulgaria,256 Liman Caspian Oil v. Kazakhstan,257 Hulley Enterprises v. Russia,258 Stati
253 Such as in the ASEAN Framework Agreement, which expressly provides that the benefits of the Agreement “shall be denied” to certain categories of investors. ↩
254 Resp. Mem., ¶165 (emphasis added). ↩
255 Article 17(2) of the ECT states: “Each Contracting Party reserves the right to deny the advantages of this Part to: [...] an Investment, if the denying Contracting Party establishes that such Investment is an Investment of an Investor of a third state with or as to which the denying Contracting Party: (a) does not maintain a diplomatic relationship; or (b) adopts or maintains measures that: (i) prohibit transactions with Investors of that state; or (ii) would be violated or circumvented if the benefits of this Part were accorded to Investors of that state or to their Investments” (Exhibit C1). ↩
256 Plama, ¶¶ 155-158 (Exhibit RL88). ↩
257 Liman Caspian Oil BV and NCL Dutch Investment BV v. Republic of Kazakhstan, ICSID Case No. ARB/07/14, Excerpts of Award, 22 June 2010 (Böckstiegel, Hober, Crawford) (“Liman”), ¶224 (Exhibit CL13). ↩
258 Hulley Enterprises Jurisdiction Award, ¶¶ 455-456 (Exhibit CL9). ↩
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v. Kazakhstan.259 In the words of the tribunal in Plama, “the existence of a ‘right’ is distinct from the exercise of that right”.260
245. Rather than relying on these directly relevant decisions, Respondent chooses instead to cite four non-ECT arbitral awards, which provide no assistance with respect to this issue: Guaracachi v. Bolivia,261 Pac Rim v. El Salvador,262 Ulysseas v. Ecuador263 and Empresa v. Ecuador.264 These decisions do not involve any interpretation or application of the ECT (or Article 17(1) thereof), but, rather: the US-Bolivia BIT 1998 (and Article XII(b) thereof), the Dominican Republic-Central America-United States Free Trade Agreement 2004 (CAFTA) (and Article 10.12(2) thereof) and the US-Ecuador BIT 1993 (and Article 1(2) thereof).
246. None of these investment treaties is worded or arranged in the same way as the ECT; more particularly: the reserved right to deny benefits in Article XII(b) of the US-Bolivia BIT applies to the entire treaty (including its dispute resolution provisions); Article 10.12(2) of CAFTA does not contain a reserved right to deny and applies to the dispute provisions in Chapter 10 of CAFTA in any event; and the reserved right to deny benefits in Article 1(2) of the US-Ecuador BIT applies to the entire treaty (including its dispute resolution provisions).
247. It is accordingly unsurprising that the tribunal in Guaracachi265 held that, in the case of the US-Bolivia BIT, “the consent by the host State to arbitration itself is
259 Stati, ¶745 (Exhibit CL3). ↩
260 Plama, ¶155 (Exhibit RL88). ↩
261 Guaracachi (Exhibit RL80). ↩
262 Pac Rim Cayman LLC v. The Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent’s Jurisdictional Objections, 1 June 2012 (Veeder, Tawil, Stern) (“Pac Rim”) (Exhibit RL82). ↩
263 Ulysseas, Inc. v. The Republic of Ecuador, UNCITRAL, Interim Award, 28 September 2010 (Bernardini, Pryles, Stern) (“Ulysseas”) (Exhibit RL84). ↩
265 See Resp. Mem., ¶165, citing Guaracachi (Exhibit RL80). ↩
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conditional” on the requirements of the denial of benefits provisions being satisfied.266 That is not the case in the ECT, which does not make consent to arbitration conditional on Article 17(1). Indeed, the tribunal in Pac Rim expressly distinguished Article 17(1) of the ECT from the denial of benefits provision in CAFTA:
“The Tribunal was informed by the Parties that this case is the first time that an arbitration tribunal has been required to address the issue of denial of benefits under CAFTA Article 10.12.2.In these circumstances, the Tribunal (as invited by the Parties) considered whether it was desirable for the Tribunal to draw on past decisions by tribunals addressing provisions on denial of benefits under other treaties, particularly the Energy Charter Treaty. The Tribunal has chosen not to do so here given their different wording, context and effect. (These decisions include Plama v. Bulgaria; LLC AMTO v. Ukraine (under the Energy Charter Treaty) and Petrobart v. Kyrgyz Republic; Generation Ukraine v. Ukraine (under the USA-Ukraine BIT); and, as tangentially raised, EMELEC v. Ecuador (under the USA-Ecuador BIT) and CCL Oil v. Kazakhstan (under the USA-Kazakhstan BIT)).
As expressly worded in CAFTA, it is significant that the ‘benefits’ denied under CAFTA Article 10.12.2 include all the benefits conferred upon the investor under Chapter 10 of CAFTA, including both Section A on ‘Investment’ and Section B on ‘Investor-State Dispute Settlement.’ Section B specifically includes CAFTA Article 10.16(3)(a) providing for ICSID arbitration, as here invoked by the Claimant for its claims under CAFTA to establish the Tribunal’s jurisdiction to decide those CAFTA claims against the Respondent. This jurisdictional issue under CAFTA does not therefore resemble the more limited issue under Article 17(1) of the Energy Charter Treaty, although in this respect it resembles the position under Article 1113(1) of NAFTA. The Tribunal is not aware of any decision as to denial of benefits under NAFTA; and none was brought to its attention by the Parties.”267
248. It is also noted that Respondent does not specify by what act it purported to exercise its reserved right to deny benefits to Claimant pursuant to Article 17(1). On the facts,
266 Guaracachi, ¶372 (Exhibit RL80). Similarly, the Pac Rim Tribunal’s reasoning is that “a CAFTA Party’s denial of benefits invoked after the commencement of an ICSID arbitration cannot be treated as the unilateral withdrawal of that Party’s consent to ICSID arbitration under ICSID Article 25(1)”, ¶4.90 (Exhibit RL82), cited in Resp. Mem., ¶166. ↩
267 Pac Rim, ¶¶4.2-4.4 (emphasis added) (Exhibit RL82). ↩
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Respondent did not exercise this right until its letter to the Tribunal of 11 April 2014. Accordingly, Respondent is not entitled to deny Claimant the benefit of the protections contained in Part III until after 11 April 2014 in any event.
249. Unless and until the reserved right to deny benefits to the claimant is exercised by the host state, any investor investing in the host state has the legitimate expectation that it is entitled to the protections of the ECT, and conducts itself accordingly.
250. In this context, Claimant respectfully adopts the reasoning of the tribunal in Plama in its Decision on Jurisdiction:
“Retrospective or Prospective Effect: The language of Article 17(1) ECT is not by itself clear on this important point. There is some slight guidance from Article 17(1) suggesting a prospective effect, given the use of the present tense to coincide with the right’s exercise (‘own or control’... ‘has no substantial activities’... ‘is organized’); and likewise, Article 17(2) ECT suggests only a prospective effect to a denial of advantages to an Investment (‘...if the denying Contracting Party establishes...’ etc.). However, the Tribunal would not wish to base its decision on such semantic indications only.The Tribunal returns to the object and purpose of the ECT under Article 31 of the Vienna Convention. The parties did not here invoke under Article 31(3) and (4) any subsequent agreement or practice between the ECT’s Contracting Parties or under Article 32 any of the ECT’s preparatory work. Accordingly, as with many issues of disputed interpretation turning on a relatively few words, it is a short point of almost first impression.
The covered investor enjoys the advantages of Part III unless the host state exercises its right under Article 17(1) ECT; and a putative covered investor has legitimate expectations of such advantages until that right’s exercise. A putative investor therefore requires reasonable notice before making any investment in the host state whether or not that host state has exercised its right under Article 17(1) ECT. At that stage, the putative investor can so plan its business affairs to come within or without the criteria there specified, as it chooses. It can also plan not to make any investment at all or to make it elsewhere. After an investment is made in the host state, the ‘hostage-factor’ is introduced; the covered investor’s choices are accordingly more limited; and the investor is correspondingly more vulnerable to the host state’s exercise of its right
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under Article 17(1) ECT. At this time, therefore, the covered investor needs at least the same protection as it enjoyed as a putative investor able to plan its investment. The ECT’s express ‘purpose’ under Article 2 ECT is the establishment of ‘...a legal framework in order to promote long-term co-operation in the energy field...in accordance with the objectives and principles of the Charter” (emphasis supplied). It is not easy to see how any retrospective effect is consistent with this ‘long-term’ purpose.In the Tribunal’s view, therefore, the object and purpose of the ECT suggest that the right’s exercise should not have retrospective effect. A putative investor, properly informed and advised of the potential effect of Article 17(1), could adjust its plans accordingly prior to making its investment. If, however, the right’s exercise had retrospective effect, the consequences for the investor would be serious. The investor could not plan in the ‘long term’ for such an effect (if at all); and indeed such an unexercised right could lure putative investors with legitimate expectations only to have those expectations made retrospectively false at a much later date. Moreover, in the present case, the Respondent asserts a retrospective effect from a very late date, even after the Claimant’s Request for Arbitration and the accrual of the Claimant’s causes of action under Part III ECT.
The Respondent has argued that by the very existence of Article 17(1) in the ECT, the Investor is put on notice before it makes its investment that it could be denied ECT advantages if it falls within that Article and, therefore, if it did so fall within Article 17(1) it would have no legitimate expectations of such advantages. Such an interpretation of the ECT would deprive the Investor of any certainty as to its rights and the host country’s obligations when it makes its investment and must be rejected.
For the Investor, the practical difference between prospective and retrospective effect is sharp. The former accords with the good faith interpretation of the relevant wording of Article 17(1) in the light of the ECT’s object and purpose; but the latter does not.”268
251. Other ECT arbitral tribunals interpreting and applying ECT Article 17(1) with respect to this issue have consistently adopted the same or similar reasoning:269 see Liman
268 Plama, ¶¶159-164 (emphasis added) (Exhibit RL88). ↩
269 It should be noted that this issue did not arise on the facts before the other ECT arbitral tribunals that have considered the interpretation and application Article 17(1): see Libananco Holdings Co. Limited v. Republic of Turkey, ICSID Case No. ARB/06/8, Award, 2 September 2011 (Hwang, Alvarez, Berman), ¶550 (Exhibit CL12); see also Amto, ¶ 60 (Exhibit RL77) and Petrobart, pp. 58-59 (Exhibit CL17). ↩
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Caspian Oil v. Kazakhstan,270 Hulley Enterprises v. Russia,271 and Stati v. Kazakhstan.272 Each of these tribunals found that the principle of legal certainty underpins the object and purpose of the ECT in promoting “long-term co-operation in the energy field”, and all held that Article 17(1) has prospective (rather than retrospective) effect.
252. In the words of the Liman Tribunal:
“With regard to the question of whether the right under Article 17(1) of the ECT can only be exercised prospectively, the Tribunal considers that the above mentioned notification requirement – on which the Parties agree – can only lead to the conclusion that the notification has prospective but no retroactive effect. Accepting the option of a retroactive notification would not be compatible with the object and purpose of the ECT, which the Tribunal has to take into account according to Article 31(1) of the VCLT, and which the ECT, in its Article 2, expressly identifies as ‘to promote long-term co-operation in the energy field'. Such long-term co-operation requires, and it also follows from the principle of legal certainty, that an investor must be able to rely on the advantages under the ECT, as long as the host state has not explicitly invoked the right to deny such advantages. Therefore, the Tribunal finds that Article 17(1) of the ECT does not have retroactive effect.”273
253. Respondent criticises the Plama Tribunal’s above reasoning that Article 17(1) must have prospective effect in order to protect the “long-term purpose” of the ECT, claiming that this places a host state under “an obligation to seek out foreign investors in its territory and conduct a full investigation of their owners or controllers or the extent of their business activities”.274 This criticism is unjustified. Article 17(1) reserves to a state the right to decide at any time that it no longer wishes to afford the protections in Part III to investors which fall within both Article 17(1) criteria. If, in order to determine whether to exercise this reserved right, a state wishes to conduct a
270 Liman, ¶ 225 (Exhibit CL13). ↩
271 Hulley Enterprises Jurisdiction Award, ¶¶ 455-457 (Exhibit CL9). ↩
272 Stati, ¶ 745 (“Art. 17 ECT would only apply if a state invoked that provision to deny benefits to an investor before a dispute arose”) (Exhibit CL3). ↩
273 Liman, ¶ 225 (Exhibit CL13). ↩
274 Resp. Mem., ¶168, quoting Douglas, ¶ 881-882 (Exhibit RL64). ↩
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survey of foreign investors, that is of course a matter for the state. However, this right must not be exercised unfairly or discriminatorily. Article 17(1) must be construed in a way that accords with the object and purpose of the ECT in attracting foreign direct investment, which requires investors to be provided legal certainty and good faith treatment.275
254. Legal certainty and good faith treatment is not accorded to investors by permitting states to breach treaty obligations and then subsequently deny individual investors the benefit of those obligations retrospectively, after a dispute has arisen. Respondent’s construction is an open invitation to states to violate their obligations under the ECT in the knowledge that they can subsequently deny the benefit of such obligations to certain investors with retrospective effect. In this context, it is noted that Article 17 does not automatically exclude Part III protections to investors falling within the Article 17(1) criteria, and the reservation of rights provision should not be construed in a way that is more prejudicial to such investors. Moreover, any ambiguity or doubt regarding the operation of Article 17(1) should be resolved in favour of the investor:
“[T]he investor’s bona fide reliance on the benefits under a given treaty should be granted no less consideration than the host state’s reluctance to assume obligations towards unqualified investors. Weighing the interests and legitimate expectations of the parties, it is crucial to determine what outcome is more undesirable: unjustified denial of the treaty advantages to a covered investor or granting the benefits to foreign investors on a non-reciprocal basis. Taking account of the investor’s weaker standing in international law and the fungible character of foreign capital in terms of contribution to the host state’s economy, any doubt associated with the operation of Article 17(1) should be resolved in favour of the investor.276”
275 This obligation is reflected in Article 26 of the Vienna Convention providing that “[e]very treaty in force is binding upon the parties to it and must be performed by them in good faith” (Exhibit RL49). See also Cheng, B. General Principles of Law as Applied by International Courts and Tribunals, (CUP, 2006) (“Cheng”), p.124: “When a state assumes a treaty obligation, the principle of good faith-which governs the performance of treaty obligations- imposes a general limitation on every of the State so that none may be exercised in a manner incompatible with the bona fide execution of the obligation assumed.” (Exhibit CL31) ↩
276 Gadelshina, E.R., ‘Burden of Proof Under the Denial of Benefits Clause of the Energy Charter Treaty: Actori Incumbit Onus Probandi?’ Journal of International Arbitration 29, No.3 (2012), pp. 269-84 at p. 277 (Exhibit CL36). ↩
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255. Respondent seeks to undermine the conclusion consistently reached by every ECT tribunal that has considered the issue of retrospective effect, by relying on selected passages from Ulysseas v. Ecuador and Professor Douglas.277 Respondent claims that attributing retrospective effect would not cause uncertainties in legal relations under the ECT because “the possibility for the host State to exercise the right in question is known to the investor from the time when it made it’s the [sic] investment”, so “it may be concluded that the protection afforded by the BIT is subject during the life of the investment to the possibility of a denial of the BIT’s advantages by the host State”.278
256. However, the logical outcome of this argument is that the host State may remain silent, take the benefit of the investment, but then deny the benefits of the Treaty. For what state facing a claim under the ECT would not then invoke a denial of benefits provision to avoid liability for breach of a substantive obligation? Such a construction cannot be reconciled with the object and purpose of the treaty in attracting foreign direct investment and the good faith obligations of the parties.279 It is also plainly inconsistent with the ECT’s express “purpose” under Article 2, namely, “the establishment of ‘...a legal framework in order to promote long-term co-operation in the energy field...in accordance with the objectives and principles of the Charter’ (emphasis supplied)”.280 As the Plama Tribunal concluded: “It is not easy to see how any retrospective effect is consistent with this ‘long-term' purpose.”281
257. Moreover, since the publication of the Plama decision in 2005, states bound by the ECT have been on notice that an ECT tribunal has found that any exercise of the reserved right under Article 17(1) is not retrospective, and that other ECT tribunals may follow suit. ECT jurisprudence has been consistent since the Plama decision and
277 Resp. Mem., ¶¶ 167-168, quoting Ulysseas, ¶¶ 172-173 (Exhibit RL84) and Douglas, ¶¶ 881-882 (Exhibit RL64). ↩
278 Ulysseas, ¶ 173 (Exhibit RL84). ↩
279 Reflected in Article 26, Vienna Convention (Exhibit RL49); see also Plama, ¶¶155-164 (Exhibit RL88). ↩
280 Plama, ¶161, quoting Article 2 ECT (Exhibit C1). ↩
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subsequent tribunals have not deviated from Plama’s reasoning. Furthermore, Respondent was first notified of the Loans in 2004 and of Claimant’s ECT claim in relation to the Loans when Claimant sent its trigger letter in 2008,282 several years before the commencement of these arbitral proceedings. Yet, Respondent chose not to exercise its reserved right to deny benefits to Claimant until April 2014.
258. As regards any alleged practical difficulty in notifying investors of the host state’s decision to exercise its reserved right pursuant to Article 17(1),283 this is easily overcome. As the ECT tribunal in Plama suggested, this could be addressed through “a general declaration in a Contracting State’s official gazette...; or a statutory provision in a Contracting State’s investment or other laws; or even an exchange of letters with a particular investor or class of investors.”284
259. Of course, such a notification could well have potential consequences. To adopt the words of the tribunal in Guaracachi, “the notification of the denial of benefits would – per se – be seen as an unfriendly and groundless act, contrary to the promotion of foreign investments”;285 foreign investments might be withdrawn or reorganised to ensure treaty protection and remove the state’s option to avoid litigation on breach. This is precisely the point: investors should be afforded legal certainty under the ECT before they commit substantial resources and make their investments, and are entitled to react accordingly. The decision in Guaracachi underscores the fact that, at the time of any investment, investors will conduct themselves on the basis that no such notification has been given (and that, if and when such notification is given in the future, they are likely to react very differently). In this context, the Plama decision further validated investors’ reliance on the lack of notification.
282 Letter from Claimant’s counsel Gibson, Dunn & Crutcher LLP to the Government of the Russian Federation, 27 August 2008 (Exhibit C103). ↩
284 Plama, ¶157 (Exhibit RL88). ↩
285 Guaracachi, ¶ 379 (Exhibit RL80). ↩
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260. To place the burden of uncertainty on investors would be entirely contrary to the object and purpose of the ECT and the requirement of good faith. As Professor Crawford opined in his expert opinion in Hulley Enterprises:286
“To place on an individual investor the task of obtaining express assurance as to the extension of advantages would change the ECT from a general framework for investment in the energy sector to an invitation to establish, case-by-case, bilateral relations between investors and the host State. This was plainly not the intention.”
261. In light of the above, Claimant submits there is no basis for Respondent’s contention that any exercise of its reserved right (to deny the benefit of the protections afforded by Part III) should be afforded retrospective effect, and such a construction would be contrary to ECT jurisprudence and the object and purpose of the ECT, including the requirements of legal certainty and good faith treatment.
262. Article 17(1) stipulates two substantive requirements, both of which have to be satisfied for Respondent to deny Claimant the benefit of the Part III protections under the ECT. The plain language of the Article confirms that both criteria have to be satisfied cumulatively, as evidenced by the use of the word “and” between the two limbs of the test; namely, that: (i) the investor has no substantial business activities in the state where it is organized; and (ii) the investor is owned or controlled by citizens or nationals of a third state.
263. As the party invoking the operation of Article 17(1), the burden of proof with respect to this two-limb test rests with Respondent. Article 24(1) of the UNCITRAL Arbitration Rules further confirms that it is for Respondent to prove the facts that support its claim.287 There is no basis for Respondent’s erroneous assertion that it falls
286 Hulley Enterprises Jurisdiction Award, ¶ 447 (Exhibit CL9). ↩
287 1976 UNCITRAL Rules, Article 24(1): “Each Party shall have the burden of proving the facts relied on to support his claim or defence.” ↩
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to Claimant to establish prima facie that it does not satisfy one of the Article 17(1) criteria.288 Respondent’s random references to decisions on tribunal mandates for determining facts at the jurisdictional stage neither support Respondent’s claims, nor afford any assistance to the Tribunal.289
264. It is Respondent that asserts that Claimant belongs to a class of investors that cannot benefit from the ECT protections; it is Respondent that asserts that Claimant has no substantial business activities and is controlled by citizens of a third state, in an attempt to justify its right to deny such protections. In accordance with established principles of international law,290 and the universally accepted maxim: “he who asserts must prove”, it is for Respondent to prove these claims. As demonstrated below, Respondent is wholly unable to do so.
265. Respondent claims that Claimant is a shell company, which is merely a façade and “a conduit for effectuating non-recourse, back-to-back, intra-Yukos-group ‘loans”’, without any physical presence in Luxembourg.291 According to Respondent, “Yukos Capital did not raise any funds from Luxembourg investors or lenders, nor did it finance any project in Luxembourg or extend any loans to Luxembourg borrowers.”292 Respondent further asserts that Claimant has no offices, address or telephone number, and that no decision-making activities were performed on behalf of Yukos Capital in Luxembourg.293 As Claimant demonstrates below, these assertions are either factually
289 None of the cases referenced in Resp. Mem., ¶187, FN 209 support Respondent’s allegation that the burden of proof lies with Claimant in respect of a denial of benefits claim raised by Respondent. ↩
290 Generation Ukraine, Inc. v. Ukraine, ICSID Case No. ARB/00/9, Final Award, 16 September 2003 (Paulson, Salpius, Voss) (“Generation Ukraine”), ¶15.7 (Exhibit CL8); Amto, ¶64 (Exhibit RL77); Ulysseas, ¶166 (Exhibit RL84). ↩
291 Resp. Mem., ¶¶ 173, 175. ↩
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incorrect, or irrelevant for the purposes of a determination in relation to the first limb of Article 17(1).
266. The first limb of Article 17(1) requires Respondent to show that Claimant has “no substantial business activities in the Area of the Contracting State in which it is organised”294. The ECT does not contain a definition of “substantial business activities”, nor does the Final Act of the European Energy Charter Conference provide any guidance for interpretation on this issue.295 However, a number of investment treaty tribunals have commented on what is required for the fulfilment of this condition, and, contrary to the passages selectively cited by Respondent,296 such decisions clearly establish that the requirements for “substantial business activities” are much less onerous than Respondent seeks to portray, and entirely dependent on the context of the business of Claimant.
267. The starting point under Article 31 of the Vienna Convention297 is that the terms “substantial” and “business activities” should be given their ordinary meaning in accordance with the object and purpose of Article 17(1) and the requirements of good faith. As the Amto Tribunal held: “‘substantial’ in this context means ‘of substance, and not merely of form’. It does not mean ‘large’, and the materiality not the magnitude of the business activity is the decisive question.”298 The term “substantial”, accordingly, has a qualitative rather than a quantitative meaning, designed to exclude companies that exist merely on paper without having a life of their own in the place of their incorporation. The ordinary meaning of “business activities” encompasses a wide range of commercial and administrative actions taken by or on behalf of an enterprise, which, as recognised by Respondent, plainly includes “contracting”299.
294 ECT (emphasis added) (Exhibit C1). ↩
296 See authorities in Resp. Mem., ¶ 170, fn. 182. ↩
297 Vienna Convention (Exhibit RL49). ↩
298 Amto, ¶ 69 (Exhibit RL77). ↩
299 Resp. Mem., ¶170 and fn. 182. ↩
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268. It is for each tribunal to determine whether a respondent has proven the relevant threshold in the context of the facts of each case (see the commentators cited by Respondent,300 other commentators,301 and the investment treaty tribunals that have sought to construe this limb of Article 17(1)).302 Thus, in respect of a real estate investment company, factors such as the existence of an office, a bank account, payment of taxes and local employment may constitute “substantial business activities”.303 For a holding company, appropriate indicators would include: where board meetings were held and whether the company had a continuous physical presence or a bank account in the country of incorporation.304
269. For the purposes of this case, the relevant facts are that, under Luxembourg law, incorporation in Luxembourg requires that a company has its “real” presence in Luxembourg (real seat theory),305 rather than a nationality of convenience. As a result, domiciliation service providers afford Luxembourg companies all of the logistics required to have a physical operational presence in Luxembourg and to conduct business out of Luxembourg. These services are tightly controlled and may only be offered by certain regulated professions: such as banks, lawyers, auditors and accountants.306 The role provided by TMF Luxembourg to Claimant amounted to providing Claimant with the logistical ability to run its business affairs from Luxembourg.
300 Baltag, C., The Energy Charter Treaty: The Notion Of Investor (2012), p. 163 (Exhibit RL62); see also Mistelis, L.A. and Baltag, C., ‘Denial of Benefits and Article 17 of the Energy Charter Treaty’, Penn State Law Review, Vol. 113:4, (2009), pp.1301-21 at p.1315 (Exhibit CL40). ↩
301 Zhang X-J., ‘Proper Interpretation of Corporate Nationality under International Investment Law to Prevent Treaty Shopping’, 6(1) Contemp. Asia Arb. J.49 (2013), pp. 49-70 at p.59 (Exhibit CL47). ↩
302 Amto, ¶¶ 63-65 (Exhibit RL77). ↩
303 Amto, ¶¶ 68-70 (Exhibit RL77). ↩
304 Pac Rim, ¶ 4.72 (Exhibit RL82). ↩
305 Luxembourg Law of 10 August 1915 on Commercial Companies, as amended (the “Luxembourg Company Law”), Article 2 (Exhibit CL50). ↩
306 Luxembourg Law of 31 May 1999 governing the Domiciliation of Companies, Article 1(1) (Exhibit CL51). ↩
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270. More specifically, in furtherance of Claimant’s principal business purpose, i.e. acting as a group finance company, Claimant entered into numerous loan agreements as either lender or borrower. In 2003 and 2004 (prior to Russia’s expropriation of Yukos Oil), Claimant entered into at least 40 loan agreements,307 including the Loans. All of these 40 loan agreements were executed on behalf of Claimant in Luxembourg by its sole director, TMF Luxembourg, with an aggregate value in excess of US$ 10 billion. On any view, the execution of these loan agreements constitutes very significant business activities, especially given Claimant’s principal business purpose: that of acting as a group finance company.
271. In light of the enormity of these contracts (comprising in monetary value both many billions of dollars, as well as virtually all of Claimant’s business activities), Respondent’s claim that Claimant has no substantial business activities in Luxembourg is risible. However, for the sake of completeness, Claimant addresses in detail below the inaccuracies and misconceptions in Respondent’s submissions.
272. Claimant was incorporated in Luxembourg on 31 January 2003 as a limited liability company in order to provide the Yukos Group with a tax efficient finance structure.308 Claimant was always intended to be an active group finance company, borrowing from one or more group companies and on-lending at arm’s length interest rates to various other group companies.309
307 See, for example., December 2003 Loan (Exhibit C9); August 2004 Loan (Exhibit C30); Loan Agreement 01-07, 20 July 2004; Loan Agreement 04-07, 23 July 2004, Loan Agreement 07-07, 4 August 2004; Loan Agreement 11-08, 13 August 2004 (all included in Exhibit R53); Loan Agreement 02-07, 20 July 2004, Loan Agreement 05-07, 27 July 2004, Loan Agreement 08-07, 4 August 2004 (all included in Exhibit R54); Loan Agreement 03-07, 20 July 2004, Loan Agreement 06-07, 27 July 2004 (both included in Exhibit R72); Loan Facility Agreement between Brittany Assets Limited and Yukos Capital, 20 November 2003 (Exhibit C130); Loan Agreement HgYCS-1808/04, 18 August 2004 (Exhibit C131). ↩
308 Extract from the Luxembourg Register of Commerce, 26 March 2003 (Exhibit C120). ↩
309 Loyens February 2003 Letter (Exhibit C128). ↩
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273. On incorporation, TMF Luxembourg was appointed as Claimant’s sole director (gérant), and remained Claimant’s sole director until 6 February 2007.310 Thus, from incorporation in 2003 to February 2007, Claimant’s board was Luxembourgian. From 2003 onwards, TMF Luxembourg was also appointed as Claimant’s domiciliary agent pursuant to a Domiciliation Agreement.311
274. In March 2003, Claimant further entered into a Management Agreement with TMF Luxembourg and Claimant’s sole direct shareholder (originally Yukos Finance BV, and then subsequently, from April 2005 onwards, Yukos International UK BV) (the “Management Agreement”).312 The Management Agreement authorized TMF Luxembourg to manage, maintain and operate Claimant. It further required TMF Luxembourg to “implement any and all Shareholders’ directives and instructions” with respect to the management of Claimant in full compliance with Luxembourg laws, regulations and statutory requirements.
275. Pursuant to Claimant’s Articles of Association, its director(s) have decision-making powers. Article 12 provides that all powers not expressly reserved by law or by the Articles to the shareholders fall within the competence of the company’s managers/directors.313
276. As evidenced by Claimant’s corporate documents, Claimant has at all times maintained its registered office address in Luxembourg at the office of TMF Luxembourg. The actions taken by TMF Luxembourg on behalf of Claimant, whether as sole director, domiciliary agent and/or pursuant to the Management Agreement, have been taken in Luxembourg.
310 Extract from the Luxembourg Register of Commerce, 15 February 2007 (Exhibit C123). ↩
311 Domiciliation Agreement, 6 February 2003 (Exhibit C121). ↩
312 Management Agreement, 20 March 2003 (Exhibit C122) and Management Agreement, 18 October 2006 (Exhibit C152). ↩
313 Yukos Capital’s Articles of Association, 31 January 2003 and 28 September 2004 (Exhibit R77). ↩
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277. On 6 February 2007, Daniel Feldman was appointed as the sole director of Yukos Capital,314 and on the same day, TMF Luxembourg was appointed an attorney-in-fact with authorization to handle day-to-day administrative matters on behalf of Claimant in Luxembourg, including administrative correspondence with banks in and outside Luxembourg, and all filings with the Luxembourg Trade Register and the Tax Authority.315
278. Daniel Feldman was originally based in Moscow, but left Russia in or around February 2007. He is a US citizen and currently lives in the US. Mr. Feldman ceased his role as a director of Yukos Capital on October 10.
279. On 30 August 2012, David Godfrey was appointed as a director.316 Mr. Godfrey is a US citizen and currently lives in the US. He continues to serve as Claimant’s director. On 10 October 2014, Bruce Misamore was appointed as a director.317 Mr. Misamore is a US citizen and currently lives in the US.
280. On 9 February 2004, the Luxembourg Administration Des Contributions Directes (the “Luxembourg Tax Authority”) issued Claimant with a certificate of residence.318 The certificate confirmed that, to the best of the Luxembourg Tax Authority’s knowledge, Claimant was resident in Luxembourg within the meaning of Article 4 of the Tax Convention between Luxembourg and Russia, was not a holding company and had no permanent establishment in Russia.
281. The law firm Loyens has liaised with the Luxembourg Tax Authority on behalf of Claimant from 2003 onwards.
314 Extract from the Luxembourg Register of Commerce, 15 February 2007 (Exhibit C123). ↩
315 Written Resolution of the Sole Director, 6 February 2007 (Exhibit C124). ↩
316 Extract from the Luxembourg Register of Commerce, 30 August 2012 (Exhibit C153). ↩
317 Misamore Statement, ¶ 6; Extract from the Luxembourg Register of Commerce, 13 October 2014 (Exhibit C154). ↩
318 Certificate of Residence, 9 February 2004 (Exhibit C126). ↩
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282. On 27 February 2003, Loyens wrote to the Luxembourg Tax Authority on behalf of Claimant informing them of Claimant’s Luxembourg incorporation, establishment, tax status and intended activities, including the company’s role as a group financing company.319 In particular, the letter records that:
283. The Luxembourg Tax Authority stamped this letter with its approval in March 2003.
284. On 9 April 2004, Loyens wrote to the Luxembourg Tax Authority on behalf of Claimant requesting a revision of the agreed income spread from 1/16% to 1/32%, owing to the increase in the total amount of Claimant’s lending activities (from an anticipated US$ 500 million to an anticipated US$ 3 billion) on the basis that:
319 Loyens February 2003 Letter (Exhibit C128). ↩
320 Loyens February 2003 Letter (Exhibit C128). ↩
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“such interest spread of 1/32% can be considered as an arm’s length remuneration for Yukos’ activities [...]. In our experience, banks and similar financial institutions when acting with third parties in the normal course of their business under comparable terms and conditions generally derive an interest margin from such activities which is similar.”321
285. The Tax Authority stamped this letter with its approval in April 2004.
286. In January 2004, the Russian Ministry for Tax (now the Russian Federal Tax Service) issued Yukos Capital with a registration certificate, which confirms that Yukos Capital is a foreign Luxembourgian entity. Registration was effective on 2 December 2003.322
287. Claimant’s place of corporate administration remains in Luxembourg, and business activities have been conducted in Luxembourg on behalf of Claimant by TMF Luxembourg and Loyens throughout its history:
321 Loyens April 2004 Letter (Exhibit C129). ↩
322 Certificate of Registration, 20 January 2004 (Exhibit C127). ↩
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opened and closed bank accounts from Luxembourg; and (v) Claimant appointed professional advisors in Luxembourg.324
288. It follows from the above that Claimant has had substantial business activities in Luxembourg throughout its existence. As a result of Respondent’s treaty breach, Claimant’s business activities as a whole have been dramatically curtailed. Respondent is correct that, since at least 2006, Claimant has been unable to engage in its principal business activity “as an active group finance
324 See, for example, Letter from Yukos Capital to Yukos UK Limited, 1 December 2003 (Exhibit C159); Letter from Yukos Capital to Yukos Oil, 19 December 2003 (Exhibit C160); Letter from Yukos Capital to Yukos OAO Yuganskneftegaz, 20 January 2004 (Exhibit C161); Letter from Yukos Capital to Yukos Oil, 19 October 2004 (Exhibit C155); Letter from Yukos Capital to Hedgerow, 19 October 2004 (Exhibit C162); Letter from Yukos Capital to Hedgerow, 30 December 2004 (Exhibit C138); Reconciliation in relation to the December 2004 Loan, 31 December 2004 (Exhibit C157); Reconciliation in relation to the August 2004 Loan, 31 December 2004 (Exhibit C158); Letter from Yukos Capital to Yukos Oil, dated 20 January 2005 (Exhibit C156); Letter from Yukos Capital to Tomskneft, 20 January 2005 (Exhibit C163); Immediate Repayment Request to YNG, 25 April 2005 (Exhibit C164); Letter from Yukos Capital to PwC, 23 September 2005 (Exhibit C165); Notice of Default, 11 November 2005 (Exhibit C139); Letter from Yukos Capital to Yukos Oil, 25 November 2005 (Exhibit C166); Countersigned letter from Fairoaks to Yukos Capital, 20 October 2006 (Exhibit C167); Letter from Yukos Capital to Barclays Bank, 15 July 2011 (Exhibit C168); Letter from Yukos Capital to ECOVIS Crown Audit, 18 July 2012 (Exhibit C169). ↩
325 See Yukos Capital Accounts for period ended 31 December 2003 (Exhibit R57). ↩
326 See Yukos Capital Accounts for year ended 31 December 2006 (Exhibit R41). ↩
327 See, for example, Board Resolution of 3 February 2003 (Exhibit C170) and Board Resolution of 11 March 2005 (Exhibit C171). ↩
328 See, for example, Convening Notice for Board Meeting to be held on 26 July 2013 (Exhibit C172) and Convening Notice for Board Meeting to be held on 11 July 2014 (Exhibit C173). ↩
329 See, for example, Extraordinary General Meeting of 21 September 2004 (Exhibit C174) and Minutes of the Annual General Meeting of 18 July 2012 (Exhibit C175). ↩
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company, ...borrow[ing]...from one or more group companies and...on-lend[ing]...at arm’s length interest rates to various group companies”.330 However, this has been the result of Respondent’s breach of the ECT, and Respondent cannot rely on the consequences of its own treaty breach as a foundation for denying Claimant the benefit of ECT protections.331
289. As regards Respondent’s specific assertions:
330 As described in the Loyens February 2003 Letter (Exhibit C128); see Resp. Mem., ¶175. ↩
331 The principle of “nullus commondum capere de sua injuria” (no one can be allowed to take advantage of its own wrong) is a long established and well-recognised principle of international law. See Cheng, pp.149-155. (Exhibit CL31) ↩
332 Resp. Mem., ¶¶ 170, 171, 173, 175. ↩
333 Loyens February 2003 Letter (Exhibit C128). ↩
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Luxembourg telephone number; and a Luxembourg fax number for correspondence, and key correspondence is sent to and from the Claimant’s Luxembourg office.334 It is irrelevant that Claimant has mainly conducted its business in Luxembourg through TMF Luxembourg (as Claimant’s sole director, manager and/or domiciliary agent).
337 Privilege in this regard is not intended to be waived. ↩
338 See translated extract from the Luxembourg Court of Appeal decision of 13 February 2007 (Exhibit C176); see also Decision of the Luxembourg District Court annulling order of 10 December 2009 dated 12 July 2012 (Exhibit C177). ↩
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has been forced to defend two sets of proceedings within Luxembourg. It goes without saying that Claimant has no choice as to where it can best pursue its claims to recover losses suffered, and must pursue the claims available to it wherever a court or tribunal has jurisdiction to hear such claims.
290. It follows from the above that Claimant has had substantial business activities in Luxembourg throughout its corporate existence, especially when viewed in the context of the Claimant’s business as a group financing company. Claimant executed at least 40 loan agreements in Luxembourg with an aggregate value in excess of US$ 10 billion. In the circumstances, any claim that Claimant has no substantial business activities in Luxembourg must fail on this basis alone.
291. The second limb of Article 17(1) requires that an Investor be owned or controlled by citizens or nationals of third states. Respondent does not dispute (nor could it) that Yukos Capital’s shares are wholly owned by two Dutch entities, Yukos International (directly) and Yukos Stichting (indirectly), which are both incorporated in a Contracting State (the Netherlands).340 However, Respondent makes the obviously wrong assertion that Claimant is controlled by nationals of a third state because of the US citizens who currently sit on the Board of Yukos Stichting.
292. Respondent’s arguments are summarised in the following extracts from its Memorial:
“Control for purposes of Article 17(1) ECT includes control in fact, including a financial or equity interest in a company, the ability to exercise substantial influence over its management and operation, and the selection of members of its board of directors or other managing body.As shown below, Yukos Capital is controlled by the US nationals who are board members of [Yukos Stichting].
[...]
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The Stichting controls Yukos Capital through its 100% shareholding in Yukos International, which in turn owns 100% of Yukos Capital.[...] the Stichting has no owners and is managed and controlled solely by its Board, which represents the Stichting. [...]
It follows that the Stichting is controlled by its Board of directors, which controls Yukos Capital through the Stichting’s 100% shareholding in Yukos International.
[...]
In conclusion, Claimant is controlled by citizens of a third State, the United States [...]” 341
293. The fundamental flaw in the above analysis is that Respondent makes an illogical quantum leap from Yukos Stichting’s Board having control of Yukos Stichting, to control being exercised by the individual directors that comprise the Board. Such a proposition is plainly wrong and runs contrary to universal principles of corporate law, as well as the specific provisions of Dutch law.
294. As a legal person, any corporation acts through its board of directors, but the individuals on its board do not (and cannot) act on their own behalf. While the board may be granted certain powers, the board and its directors are under a duty to act in the best interests of the corporation, which has its own legal personality and its own nationality of incorporation. Individual directors serve the interests of the corporate legal person (they do not serve themselves), and they can be replaced at any time in accordance with the corporation’s articles and applicable law. As and when individual directors are replaced by new directors, the nationality of the directors on any board may change. Such a change has no effect on the nationality of the corporate legal person (and by extension its board), which in the case of Yukos Stichting is Dutch.
295. There is no definition of “control” in the ECT and the definition found in Understanding IV(3) to the Final Act referenced by Respondent342 relates to the
341 Resp. Mem., ¶¶ 177-178, 181-183, 186. ↩
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“control” of the Investment within the meaning of Article 1(7), not the “control” of the Investor referred to in Article 17. The context of the two provisions is very different, and the definition in Article 1(7) has no application to Article 17(1).
296. Thus, the starting point for any analysis of “control” over Yukos Stichting is Dutch company law. While Dutch law is not dispositive as to the meaning of “control” as referenced in Article 17(1), it provides useful guidance.
297. As a matter of Dutch law, it is the board of Yukos Stichting (as a Dutch body) that is entrusted with the management and decision making on behalf of Yukos Stichting (not its individual members), subject always to the board’s obligation to act in the best interests of all the stakeholders in Yukos Stichting and the ultimate supervision of the Dutch courts. The role of the board is irrespective of the nationalities of its individual members. As the eminent Dutch corporate law academic and retired Judge, Professor Willems, opines in his expert report (“Willems Report”):343
“First, as discussed above, the management of the Yukos Stichting is entrusted with its board as a whole, and not with the individual directors. In accordance with article 2:9 of the Dutch Civil Code the board of the Yukos Stichting has to act as a collective and the performance of the directors’ duties has to take place collegially.Second, Respondent fails to recognize that the board of the Yukos Stichting is held to perform its duties guided by the object of the Yukos Stichting and in accordance with its articles of association. As is expressly set out in article 2 of the articles of association of the Yukos Stichting, the board has to consider not only the legitimate interests of the holders of the Depository Receipts of, but all entities and other stakeholders of the group to which Yukos International belongs and has to weigh all these interests. This is consistent with the general principles of Dutch corporate law as confirmed by the Dutch Supreme Court that the duty of any director is towards the legal person, i.e. the foundation, and the enterprise connected therewith. In performing that duty, a director has to consider the interests of all stakeholders involved and has to weigh all these interests. Any
(Cont’d from previous page)
342 Resp. Mem., ¶ 177, fn. 192. ↩
343 Expert Report of Professor Willems dated 31 October 2014 (the “Willems Rep.”). ↩
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decisions of the board of the Yukos Stichting that are in contravention of these principles can be annulled by the Dutch courts. Furthermore, the Yukos Stichting may nullify any legal act that does not further the object of the Yukos Stichting and is ultra vires. It follows from the foregoing that individual directors are not entitled to seek to use their directorship to further their own interests. To the contrary, any individual director that sought to use a company or foundation for its own interests would be in breach of its director’s obligations in contravention of Dutch law. The fact that, as the Respondent highlights, the power to remove directors from the Yukos Stichting board is in the first instance with the board, underlines that control does not lie with individual directors. This is further confirmed by the fact that the power to remove directors is ultimately with the Dutch Courts.Third, the Respondent fails to recognize the legal effect of article 7 of the Terms and Conditions of the Administration (the ‘Terms and Conditions’), which states that the Yukos Stichting exercises its shareholder’s rights ‘at its own discretion’. Whilst article 7 of the Terms and Conditions incorporates the sole discretion-principle, the effect of this article is to underline that the board of the Yukos Stichting must not simply accept instructions of the holders of the Depository Receipts. It does not detract from the principles set out above that the board of the Yukos Stichting has a fiduciary duty towards the Yukos Stichting and the enterprise connected therewith, and in performing this duty has to consider not only the legitimate interests of the holders of the Depository Receipts, but of all entities and other stakeholders of the group to which Yukos International belongs as well and has to weigh all these interests. The board of the Yukos Stichting is under a duty to resist any instructions that are contrary to these principles.
Lastly, the nationality of any individual board member has no bearing on the Yukos Stichting. Indeed, such nationality cannot be relevant as this would be a principal denial of the concept of legal personality. Dutch law does not impose any nationality requirements on the directors of a board. Individual board members can be (and frequently are) of different nationalities, for example, I note that the Yukos Stichting has both American and French directors. The fact that 4 out of 5 individual directors is a US national at a particular point in time is of no relevance, and such individual directors can be changed at any time without any regard for their nationality.”344
298. As Professor Willems confirms, under Dutch law, individual directors have to consider both the interests of Yukos Stichting, as well as the interest of all entities and
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other stakeholders of the group. The directors cannot act in their own interests, and any decisions of the board that are in contravention of the principles of reasonableness and fairness, or that are otherwise in contravention of Dutch law or the articles of association, can be annulled by the Dutch Courts pursuant to Article 2:15, subsection 1 and article 2:8 of the Dutch Civil Code.345
299. Thus, when performing their duties to Yukos Stichting, the directors do not act in an individual capacity. They rather act collectively as the Board of Yukos Stichting, representing and realising the will of Yukos Stichting as a legal person within the limits of the object of Yukos Stichting in furtherance of the interests of all of its stakeholders and subject to the overarching control of the Dutch courts.346 Individual directors do not control Yukos Stichting and each director’s individual circumstances, motives or nationality are not relevant in the performance of his/her functions or whether he/she has properly discharged his/her director’s duties.347 This is underscored by the fact that individual board members can be removed and new directors be appointed without regard for their interests or nationality.348 Indeed, the nationality of individual directors cannot be relevant, as this would be a principal denial of the concept of the Dutch legal personality of Yukos Stichting.349
300. International investment law jurisprudence also recognises that the interests and nationality of any board members are irrelevant in any consideration of control over a corporate entity. Rather, the most obvious sign of “control” over a corporate entity is the ownership of a majority of such entity’s shares. For example, the Yukos Universal tribunal identified control in the ownership of a majority of shares through two corporate levels and a further level of seven trusts.350
350 Yukos Universal Limited (Isle of Man) v. The Russian Federation, PCA Case No. AA227, Interim Award on Jurisdiction and Admissibility, 30 November 2009 (Fortier, Poncet, Schwebel), ¶¶536-537 (Cont’d on next page) ↩
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301. Other investment treaty jurisprudence also supports the notion that control over a legal person is exercised, either through ownership of the majority of shares in such legal person,351 or through ownership of less than the majority of shares but with sufficient voting power to influence the decisions made by that legal person.352 Some tribunals have even considered that a minority shareholding would suffice, provided that the minority shareholder also has influence over the decision-making process of the legal person.353 Strikingly, the determination of questions of “control” (whether described as “de facto” or “de jure”) is always linked to and based on ownership of a shareholding interest in the legal person in question.
302. For example, in Ulysseas v. Ecuador (cited by Respondent, and which concerned a denial of benefits provision under the US-Ecuador BIT as mentioned above), the parties agreed that “control” meant “legal capacity to control”.354 However, Ecuador argued that “control” should be distinguished from ownership or an ownership interest and may be based on a “contractual relationship”, such as a joint venture agreement. Ecuador’s position was therefore that the claimant entity was controlled by its joint-venture partner, owing to the fact that its partner had a veto power over vital decisions regarding the business of the joint venture. The Ulysseas tribunal rejected Ecuador’s reasoning on the basis that:
(Cont’d from previous page)
(Exhibit CL27). Yukos Universal is the companion case to Hulley Enterprises and, like this case, concerned Respondent’s expropriation of Yukos Oil. Respondent made the very same argument it now makes to this Tribunal.
351 Generation Ukraine, ¶15.9 (Exhibit CL8); Mobil Corporation, Venezuela Holdings B.V., Mobil Cerro Negro Holding Ltd., Mobil Venezolana de Petróleos Holdings Inc., Mobil Cerro Negro Ltd. and Mobil Venezolana de Petróleos Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Decision on Jurisdiction, 10 June 2010 (Guillaume, Kaufmann-Kohler, El-Kosheri), ¶160 (Exhibit CL15); Swisslion DOO Skopje v. Macedonia, The Former Yugoslav Republic of, ICSID Case No. ARB/09/16, Award, 6 July 2012 (Guillaume, Price, Thomas), ¶132 (Exhibit CL22). ↩
352 AIG Capital Partners, Inc. and CJSC Tema Real Estate Company v. Republic of Kazakhstan, ICSID Case No. ARB/01/6, Award, 7 October 2003 (Nariman, Bernardini, Vukmir), ¶10.2.2 (Exhibit CL2) ↩
353 Vacuum Salt Products Ltd. v. Government of the Republic of Ghana, ICSID Case No. ARB/92/1, Award, 16 February 1994 (Jennings, Brower, Hossain), ¶¶ 43, 53 (Exhibit CL25). ↩
354 Ulysseas, ¶168 (Exhibit RL84). ↩
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“[...] control over a company’s business does not give control over the company. The latter may always change its line of business should its shareholders or partners so decide by providing the necessary financial resources, abandoning the line of business that has proved to be inoperable or uneconomical.”355
303. This reasoning is equally applicable in the context of individual directors on the Board of Yukos Stichting who, as individuals, have no control over Yukos Stichting itself. Rather, the Board of Yukos Stichting collectively pursues its line of business in the interests of all its stakeholders under the ultimate supervision of the Dutch courts, and must abandon any line of business that proves to be incompatible with such interests.
304. In light of the above, to the extent that Yukos Stichting exercises “control” over Yukos Capital (through its 100% shareholding in Yukos International), such control can only be exercised by the Dutch legal person of Yukos Stichting, subject to the requirements of Dutch law and the ultimate control of the Dutch courts. Under Dutch law, the board of Yukos Stichting is a Dutch body irrespective of the nationalities of its individual members, and it is the board (as a Dutch entity), not its individual members, that (subject to the ultimate supervision of the Dutch courts) makes decisions over Yukos Stichting. Individual directors have no control over Yukos Stichting, and no right to influence its decisions in furtherance of their own interests. In the circumstances, Respondent’s claim that Yukos Capital is controlled by nationals of a third state is entirely without basis and must fail.
355 Ulysseas, ¶188 (Exhibit RL84). ↩
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305. For the foregoing reasons, Claimant respectfully requests the Tribunal to dismiss all the jurisdictional objections raised by Respondent and proceed to the merits stage of the proceedings.
Dated: 3 November 2014
Respectfully submitted,
Signature
Cyrus Benson
Penny Madden
Gail Elman
Ceyda Knoebel
GIBSON, DUNN & CRUTCHER LLP
Telephone House
2-4 Temple Avenue
London EC4Y 0HB
UK